credit and market risks measurement in carbon financing for chinese banks abstract this paper concerns the risk analysis of six chinese banks which are involved in carbon financing factor copula is introduced to simulate the corresponding carbon finance credit risk and market risk by latent variables in an indirect method in short the four common factors in carbon financing exchange rates interest rates cer price and brent oil prices are analyzed and explored in factor copula approach that incorporates kmv garch models in two steps the kmv and garch models are used to generate data that reflects the overall credit and market risk associated with each bank both normal copula and t copula functions are used to simulate the parameter estimations for comparison in a new way the value at risk for each of the six banks is calculated through a monte carlo simulation and compared additionally we calculate shock estimates for each factor to explore the changes in both credit risk and market risk given economic shocks also make a hypothetical analysis of the impact of the financial crisis on common factors overall our findings reveal that exchange rates and oil prices are the key factors to consider in carbon financing ping an bank is facing the most risk of all the banks in the sample while the industrial and commercial bank of china is carrying the least risk the results of this analysis gave provide some insight into domestic carbon trading and carbon markets connectivity

is the glass steagall act justified a study of the u s experience with universal banking before the glass steagall act of 1933 removed commercial banks from the securities underwriting business we evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality a comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this instead the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high quality securities jel g21 g24 n22

availability of mortgage loans in volatile real estate markets abstract this paper presents a default model for mortgages on single family houses implying a higher probability of negative equity and thus default in real estate markets with high price volatility mortgage lenders compensate for the increased default probability in volatile markets by demanding higher downpayments or increased creditworthiness of loan applicants thus making mortgage loans more difficult to obtain an empirical analysis finds greatly varying price volatility in single family real estate markets in a sample of 42 cities consistent with the implications of the model the empirical analysis finds that the fraction of low downpayment loans declines in volatile markets

financial fragility and distress propagation in a network of regions we investigate how the financial fragility in the real economy is affected by the average level of interdependence among agents across different regions of the economy to this end we develop a parsimonious agent based model of firms and banks organized in geographic regions the model is built on the framework of an existing class of models for business fluctuations the goal of our exercise is to clarify the effect on systemic failures of the interplay between network interconnectedness and financial acceleration in particular we investigate the probability of individual and systemic failures with varying levels of interconnectedness we find that in the absence of financial acceleration connectivity makes the system more resilient in contrast in the presence of financial acceleration the probability of both individual and systemic failures are minimized at intermediate level of diversification

stochastic house appreciation and optimal mortgage lending w e characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income costly foreclosure and a risky borrower who requires incentives to repay his debt we show that many features of subprime loans can be consistent with properties of the optimal contract and that when house prices decline mortgage modification can create value for borrowers and lenders our model provides a number of empirical predictions that relate the features of mortgage contracts originated in a housing boom and the extent of their modification in a slump to location and borrowers characteristics jel g20 g21 g33

international capital movements under uncertainty in this paper we analyze the determinants of international movements of physical capital in a model with uncertainty and international trade in goods and securities in our model the world allocation of capital is governed to some extent by the asset preferences of risk averse consumer investors in a one good variant in the spirit of the macdougall model we find that relative factor abundance relative labor force size and relative production riskiness have separate but interrelated influences on the direction of equilibrium capital movements these same factors remain important in a two good version with heckscher ohlin production structure in this case the direction of physical capital flow is determinate unlike in a world of certainty and may hinge on the identity of the factor that is used intensively in the industry with random technology

capital and risk new evidence on implications of large operational losses operational risk is currently receiving significant media attention as financial scandals have appeared regularly and multiple events have exceeded one billion dollars in impact regulators have also been devoting attention to this risk and are finalizing proposals that would require banks to hold capital for potential operational losses this paper uses newly available loss data to model operational risk at internationally active banks our results suggest that the amount of capital held for operational risk will often exceed capital held for market risk and that the largest banks could choose to allocate several billion dollars in capital to operational risk

determinants of banks risk exposure to new account fraud evidence from germany abstract this paper studies empirically the determinants of new account fraud risk within two dimensions the probability of fraud and the expected and unexpected monetary loss per account due to fraud by fraud risk we mean the risk that a bank fails to enforce a debt because the identity of the person incurring the debt cannot be ascertained using a unique and rich data set of account applicants provided by a german internet only bank we find that fraud risk is highly sensitive to demographic and socio economic variables like nationality gender marital status age occupation and urbanisation for example foreigners are 22 25 times more likely to commit account fraud than germans and men are 2 5 times more risky than women

recourse and residential mortgage default evidence from us states we quantify the effect of recourse on default and find that recourse affects default by lowering the borrower s sensitivity to negative equity at the mean value of the default option for defaulted loans borrowers are 30 more likely to default in non recourse states furthermore for homes appraised at 500 000 to 750 000 borrowers are twice as likely to default in non recourse states we also find that defaults are more likely to occur through a lender friendly procedure such as a deed in lieu in states that allow deficiency judgments we find no evidence that mortgage interest rates are lower in recourse states 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

the interaction between the financial and investment decisions of the firm the case of issuing warrants in a levered firm abstract in this paper we analyze the value of warrants and stock in a firm that has both equity and debt in its capital structure and assume that the proceeds from exercising the warrants are reinvested in the firm the effect of potential future scale investment on the firm s stock debt and warrants are investigated the warrants in our analysis are european in this framework there are two sources for the nonstationarity of the rate of return on any kind of financial claim the first stems from changes in the firm s capital structure and the second is due to the potential scale increase in the value of the firm should the warrants be exercised the effect of a potential transfer of wealth from equity holders to debt holders at time of exercise is analyzed when warrants are exercised and the proceeds are reinvested in a scale expansion project the probability of default may decrease it follows therefore that ceteris paribus debt is likely to appreciate in value at the expense of equity the method of pricing by arbitrage as proposed by harrison and kreps is used to derive values for claims on the firm problems associated with measuring the volatility of equity are discussed

predicting loss severities for residential mortgage loans a three step selection approach abstract this paper develops a novel framework to model the loss given default lgd of residential mortgage loans which is the dominant consumer loan category for many commercial banks lgds in mortgage lending are subject to two selection processes default and cure where the collateral value exceeds the outstanding loan amount we propose a three step selection approach with a joint probability framework for default cure i e zero lgd and non zero loss severity information the proposed methodology demonstrates improved performance in out of time predictions compared to widely used ols regressions

credit ratings and the bis capital adequacy reform agenda abstract in this paper we have revised and updated our earlier study in order to analyze the most recent second draft of the bis s proposed reforms of bank capital requirements we conduct monte carlo experiments using data on defaults and severity rates on publicly traded us corporate bonds over the 1981 1999 period analyzing the whole period and various sub periods it is clear that the most recent draft of the bis proposed reforms seriously overestimates the relative riskiness of high quality debt relative to low quality debt in the so called standardized model as a result the most recent proposal still contains inherent risk shifting taking incentives for banks

reforming bank capital requirements implications of basel ii for latin american countries the controversial proposal to overhaul the international accord regarding the regulation of bank capital was completed in 2004 and the thirteen basel committee member countries are set to implement the new accord known as basel ii by 2007 we develop a basel ii decision tree to guide policymakers facing the issue of whether to adopt the new accord we also estimate credit risk in banks across three latin american countries using a homogeneous methodology our findings suggest that latin america falls between the two main basel ii alternatives non g10 countries may thus wish to recalibrate basel ii s internal ratings based irb approach alternatively we propose an intermediate centralized ratings based crb approach we argue that the crb approach may be made compatible with basel ii by developing an integrated policy for provisions and capital we perceive a danger that basel ii may be adopted too quickly or inappropriately and may then represent the end of a standard rather than the establishment of a new one we suggest that a basel ii compatible crb approach with homogeneous definitions would enhance true comparability

risk based pricing and the enhancement of mortgage credit availability among underserved and higher credit risk populations this paper estimates an option based hazard model of the competing risks of fha mortgage termination results indicate that the elevated default risks of loans originated among lower credit quality and minority borrowers are more than offset by the damped prepayment speeds of those loans so as to result in markedly lower loan termination probabilities among underserved borrower groups those damped termination risks translate into sizable reductions in risk premia to investors in simulated lower creditquality mortgage pools empirical findings suggest that such pooling and risk based pricing of fha insured mortgages could serve to substantially reduce housing finance costs among underserved borrowers so as to advance both their homeownership opportunities and related federal housing policy objectives

the effect of state foreclosure laws on loan losses evidence from the mortgage insurance industry this paper analyzes the effect of three major provisions of state foreclosure laws procedure redemption period and provision for deficiency judgment on loan losses as reflected in the claims paid by private mortgage insurers and the fha it also explores the significance of the incentive conflict between the lender and the insurer in terms of the presence or absence of a coinsurance relationship and the existence of a deficiency judgment the results demonstrate that foreclosure laws have a significant effect on loan losses and that the existence of a deficiency judgment affects the incentive conflict between lender and insurer copyright 1990 by ohio state university press

sorting out risks using known apt factors arbitrage pricing theory apt differs from the capital asset pricing model capm in hypothesizing that actual and expected security returns are sensitive not to just one type of nondiversifiable risk i e beta or market risk but to a variety of different ypes of risk prior testing has shown the capm to be inferior to an apt model that incorporates unanticipated changes in five macroeconomic variables default risk the term structure of interest rates inflation or deflation the long run expected growth rate of profits for the economy and residual market risk it is possible to estimate the sensitivities of individual securities or portfolios to these five risk factors such measurements allow one to explore variations in sensitivities to different types of risk across both equity market sectors and industries the resulting risk exposure profiles do not depend on any particular market index apt risk profiles may be used for either active or passive portfolio management passive managers wishing to reduce their portfolios systematic risk characteristics might consider a technique termed risk sterilization here assets with different risk profiles are combined so as to negate or sterilize exposure to selected riskfactors alternatively active managers can attempt to achieve excess returns by constructing portfolios in accordance with their forecasts of risk factor realizations

bank ratings what determines their quality this paper examines the quality of credit ratings assigned to banks by the three largest rating agencies we interpret credit ratings as relative assessments of creditworthiness and define a new ordinal metric of rating error based on banks expected default frequencies our results suggest that on average large banks receive more positive bank ratings particularly from the agency to which the bank provides substantial securitization business these competitive distortions are economically significant and contribute to perpetuate the existence of too big to fail banks we also show that overall differential risk weights recommended by the basel accords for investment grade banks bear no significant relationship to empirical default probabilities harald hau sam langfield and david marques ibanez

default correlation an empirical investigation of a subprime lender in recent years subprime lending has grown substantially as an important sector of the credit markets this paper is concerned with the risk management of subprime loan portfolios and the importance of default correlation in measuring that risk using a large portfolio of residential subprime loans from an anonymous subprime lender we show that default correlation is substantial for this lender in particular the significance of default correlation increases as the internal credit rating declines our results suggest that lenders and regulators would be well served investing in the understanding of default correlation in subprime portfolios

credit risk measurement developments over the last 20 years abstract this paper traces developments in the credit risk measurement literature over the last 20 years the paper is essentially divided into two parts in the first part the evolution of the literature on the credit risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the journal of banking and finance and other publications in the second part a new approach built around a mortality risk framework to measuring the risk and returns on loans and bonds is presented this model is shown to offer some promise in analyzing the risk return structures of portfolios of credit risk exposed debt instruments

determinants of mortgage default and consumer credit use the effects of foreclosure laws and foreclosure delays the mortgage default decision is part of a complex household credit management problem we examine how factors affecting mortgage default spill over to other credit markets as home equity turns negative homeowners default on mortgages and home equity lines of credit at higher rates whereas they prioritize repaying credit cards and auto loans larger unused credit card limits intensify the preservation of credit cards over housing debt although mortgage nonrecourse statutes increase default on all types of housing debt they reduce credit card defaults foreclosure delays increase default rates for housing and nonhousing debts our analysis highlights the interconnectedness of debt repayment decisions

comments on credit ratings and the bis capital adequacy reform agenda the new basel capital accord basel committee on banking supervision 1999 has the objective of making capital requirements appropriately sensitive to the degree of risk in bank activities this is important because the original capital accord 1998 has been widely criticized for the lack of risk sensitivity of the capital charges assessed against various types of loans many observers believe this has resulted in regulatory arbitrage on the part of banks to the detriment of the quality of the assets banks hold on their books the basel committee has proposed a standardized approach for determining risk based capital using external ratings and two other approaches based on internal models for dealing with credit risk 1 altman et al 2002 examines in detail whether the goal of appropriate risk sensitivity is met by the proposed risk weights of the standardized approach the main conclusion of the altman et al paper and the underlying issues can be seen in fig 1 which plots the proposed risk weights and the historical corporate bond losses by rating as the authors note ratings aaa through a have experienced virtually no defaults but are assigned weights of 20 aaa and aa and 50 a percent more problematic the proposed risk weights for baa and ba rated loans are both 100 even though the loss experience for ba is 10 times higher than for baa finally the b and below rated loans have risk weights only half again as large as baa rated loans while the historical loss experience has been 55 times greater thus the basel proposal fails to capture the relative risks of the various ratings altman et al journal of banking finance 26 2002 923 928

a comparative analysis of current credit risk models the new bis 1998 capital requirements for market risks allows banks to use internal models to assess regulatory capital related to both general market risk and credit risk for their trading book this paper reviews the current proposed industry sponsored credit value at risk methodologies first the credit migration approach as proposed by jp morgan with creditmetrics is based on the probability of moving from one credit quality to another including default within a given time horizon second the option pricing or structural approach as initiated by kmv and which is based on the asset value model originally proposed by merton merton r 1974 journal of finance 28 449 470 in this model the default process is endogenous and relates to the capital structure of the firm default occurs when the value of the firm s assets falls below some critical level third the actuarial approach as proposed by credit suisse financial products csfp with creditrisk and which only focuses on default default for individual bonds or loans is assumed to follow an exogenous poisson process finally mckinsey proposes creditportfolioview which is a discrete time multi period model where default probabilities are conditional on the macro variables like unemployment the level of interest rates the growth rate in the economy which to a large extent drive the credit cycle in the economy 2000 elsevier science b v all rights reserved

the resolution of financial distress most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm this approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization in this article we show that despite the possibility of costless reorganization it may be rational for firms to incur significant costs in the resolution of financial distress the main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

policy implications of the federal reserve study of credit risk models at major us banking institutions abstract the current regulatory capital standard for banks the basle accord is a lose lose proposition regulators cannot conclude that a bank with a nominally high regulatory capital ratio has a correspondingly low probability of insolvency on the other hand because the accord often levies a capital charge out of proportion to the true economic risk of a position banks must engage in regulatory capital arbitrage or exit their low risk business lines since such arbitrage is costly the capital regulations keep banks from maximizing the value of the financial firm regulators need to answer three questions 1 what are the goals of prudential regulation and supervision 2 how should bank soundness be defined and quantified 3 at what level should a minimum soundness standard be set in order to meet the perhaps conflicting goals of prudential regulation and supervision possible answers to these questions are attempted then the paper analyzes the two leading proposals for rationalizing the accord a modified basle or ratings based approach and a full models approach

bank firm relationships financing and firm performance in germany abstract close bank firm relationships that characterize the financial systems in germany and japan are often credited for reducing agency costs and increasing access to capital thus improving the performance of firms critics of these banking systems cite the alternative possibility that conflicts of interests may also arise from both the banks multiple roles with the firm and the opportunity the banks have to use private information to shift risk or to otherwise participate in rent seeking activities we extend the empirical literature by systematically investigating the impact of bank influence on the financing choices and performance of the firm we find that bank influenced firms in germany do benefit from increased access to capital there is however no evidence to support the hypothesis of either higher profitability or growth for bank influenced firms results suggest that the interest payments to debt ratio is significantly higher for bank influenced firms which supports the hypothesis that german universal banks may engage in rent seeking activities and provides evidence of a conflicting interests between creditors and shareholders

securitization and bank performance theory suggests that securitization provides financial institutions with an opportunity to lower the cost of funding improve credit risk management and increase profitability in practice however it might lead to adverse consequences through a number of indirect channels therefore the net impact of securitization on bank performance is ambiguous this study aims to evaluate whether banks improve their performance through the use of the securitization market by applying a propensity score matching approach in other words we build a counterfactual group of banks to assess what would have happened to the securitizing banks had they not securitized using us commercial banking data from 2001 to 2008 we first test these hypotheses using univariate analysis and find that securitizing banks are on average more profitable institutions with higher credit risk exposure and higher cost of funding however the propensity score matching analysis does not provide evidence of significant causal effects of securitization on the performance of banks therefore securitization does not seem to outperform alternative funding risk management and profitability improvement techniques used by banks that have ex ante similar characteristics to those securitizing our evidence raises important questions about the motives for banks increasing securitization activities and consequent implications for the banking system

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

a guide to choosing absolute bank capital requirements resampling implementation of a stress scenario approach to estimating portfolio default loss distributions is proposed as the basis for estimates of the appropriate absolute level of economic capital allocations for portfolio credit risk estimates are presented for stress scenarios of varying severity and implications of different time horizons are analyzed results for a numeraire portfolio are quite sensitive to such variations although the analysis is framed in terms of recent proposals to revise regulatory capital requirements for banks the arguments and results are also relevant for bankers making capital structure decisions

investment banks as corporate monitors in the early twentieth century united states we study the effect of financial relationships on firms investment decisions and access to external finance in the early twentieth century securities underwriters commonly held directorships with american corporations section 10 of the clayton antitrust act prohibited bankers from serving on the boards of railroads for which they underwrote securities we find that following the implementation of section 10 railroads with strong preexisting relationships with underwriters saw declines in their investment rates valuations and leverage and increases in their costs of external funds reassuringly we do not observe similar effects among industrials and utilities which were not subject to section 10 our results are consistent with underwriters on corporate boards acting as delegated monitors and highlight the potential for regulations intended to address conflicts of interest to disrupt valuable information flows

capital market information and industrial performance the role of west german banks in orthodox theory external capital markets play a dual role supplying various forms of investment finance and disciplining firms which are inefficient or fail to pursue profit goals an extensive literature speaks of the efficiency of external capital markets meaning that firms can make production investment decisions and investors can choose among the securities that represent ownership of firms activities under the assumption that security prices at any time fully reflect all available information fama i970 1 however this concept of efficiency is purely technical it depends critically on what information is available and we know there are problems of appropriability and failure in information markets deriving ultimately from certain peculiarities of information as a commodity arrow i962 thus another growing literature focusses on problems of achieving equilibrium in markets where agents are imperfectly or asymmetrically informed amongst other things this literature shows that informational failures of the kind in question can lead to capital rationing in loan and credit markets and the use of strict collateral requirements as screening devices jaffee and russell i976 stiglitz and weiss i98i cable and turner i983 these may then be expected to affect the efficiency of individual firms and the system as a whole capital shortage implies that some profitable investment opportunities are foregone and production choices may also be distorted by the need to satisfy additional financial constraints contrived to elicit signals of creditworthiness of the firms undertaking them similarly the disciplining role of external capital markets can be impaired by information impactedness williamson i975 and the costs of mobilising and giving effect to shareholders preferences thus in the principal agent framework developed by jensen and meckling i976 and fama i980 the degree of constraint on managerial pursuit of non profit goals as posited by managerial theorists depends on the transactions costs of stock owner intervention the result is an optimal degree of departure from cost minimising profit maximising behaviour determined by the level of transactions costs institutional factors which affect the way information is distributed amongst agents can therefore have an important bearing on allocative and technical efficiency and the west german system of industrial finance provides an in

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

the long term default performance of bank underwritten security issues abstract the glass steagall act of 1933 barred commercial banks and their affiliates from underwriting and dealing in securities activities amidst concerns that banks abused the trust of their depositors and clientele by systematically underwriting poor quality security issues this paper examines if these concerns were justified by studying the long term default performance of bank underwritten issues as compared to non bank underwritten issues the evidence shows that contrary to conventional wisdom bank underwritten issues defaulted less than non bank underwritten issues over a seven year period from the issue date and had a significantly lower mortality rate

industry wide corporate fraud the truth behind the volkswagen scandal corporate fraud committed under climate mitigation pressures is becoming more frequently observed in line with the ever increasing environmental standards and relevant regulation enforcements one example is the volkswagen emission gate scandal using firm level panel data of major automobile manufacturers from 2000 to 2015 this study empirically identifies the motives behind the corporate deception scandal we develop a conceptual model summarising the factors affecting decision making and the firms environmentally responsible investments eris including the truthfulness of related public communications our findings identify legal and regulatory pressures the firm s existing level of eris competency and expertise pressures from emission regulation market competitors consumers owners or shareholders as the key factors inducing the scandal the empirical findings show that firms are more likely to experience corporate fraud if their senior managers are paid with substantial variable components that may lead them to engage in riskier business behaviour and to be more short term focused thereby supporting the well established contract theory to avoid corporate fraud and engage in legitimate business competitiveness we suggest that firms should focus on technological innovation as well as improving corporate governance and leverage ratios to effectively control and monitor management in addition policy makers should be more realistic about practical and commercial limitations in the policy setting process and take on a more supporting role in achieving technological innovations and effective corporate governance in summary we argue that cleaner production is not only the result of technologically progress and research but importantly it also involves issues associated with corporate governance and business ethics

trade credit for supply chain coordination abstract trade credit is a seller s short term loan to the buyer allowing the buyer to delay payment of an invoice it has been the largest source of working capital for a majority of business to business firms in the united states numerous theories have been proposed to explain trade credit mainly from finance perspectives it has also been an important issue in supply chain management surprisingly most literature in supply chain management has examined the retailer s stocking policies given a supplier s trade credit this paper attempts to shed light on trade credit from a supplier s perspective and presents it as a tool for supply chain coordination specifically we explicitly assume firms financial needs for inventory following a newsvendor framework we assume that the supplier grants trade credit and markdown allowance given the supplier s offer the retailer determines order quantity and the financing option for the inventory either trade credit or direct financing from a financial institution our result shows that the supplier s markdown allowance alone cannot fully coordinate the supply chain if the retailer employs direct financing positive financing costs call for trade credit in order to subsidize the retailer s costs of inventory financing using trade credit in addition to markdown allowance the supplier fully coordinates the retailer s decisions for the largest joint profit and extracts a greater portion of the maximized joint profit

an analysis and critique of the bis proposal on capital adequacy and ratings abstract this paper examines two specific aspects of stage 1 of the bank for international settlement s bis s proposed reforms to the 8 risk based capital ratio we argue that relying on traditional agency ratings could produce cyclically lagging rather leading capital requirements resulting in an enhanced rather than reduced degree of instability in the banking and financial system despite this possible shortcoming we believe that sensible risk based weighting of capital requirements is a step in the right direction the current risk based bucketing proposal which is tied to external agency ratings or possibly to internal bank ratings however lacks a sufficient degree of granularity in particular lumping a and bbb investment grade corporate borrowers together with bb and b below investment grade borrowers severely misprices risk within that bucket and calls at a minimum for that bucket to be split into two we examine the default loss experience on corporate bonds for the period 1981 1999 and propose a revised weighting system which more closely resembles the actual loss experience on credit assets

credit risk in private debt portfolios default loss severity and average loss rates for a large sample of privately placed bonds are presented and compared with loss experience for publicly issued bonds the chance of very large portfolio losses is estimated and some determinants of such losses are analyzed results show ex ante riskier classes of private debt perform better on average than public debt both diversification and the riskiness of individual portfolio assets influence the bad tail of the portfolio loss distribution private placements are similar to corporate loans in that both are monitored private debt the results are thus relevant to management and securitization of private debt portfolios generally more than half of nonfinancial corporate debt finance is iss ued privately and decisions of the financial intermediaries that invest in such debt depend importantly on its credit risk regulators of such institutions are similarly attentive to portfolio credit risk and it is an important consideration in the design of securitizations of pools of private debt in spite of its importance little is known empirically about private debt credit risk especially ex ante risk as a function of portfolio characteristics many studies have examined the loan portfolio performance of banks thrifts and insurance companies but the ex ante risk characteristics of the portfo

impact of state exemption laws on small business bankruptcy decision 1 introductionsmall businesses are a primary source of employment in the u s economy employing over half of the private sector workforce small businesses are responsible for about two thirds of all net new jobs created according to the 2002 small business economic indicators sbei 1 over 99 7 of the 5 7 million firms in the united states are classified as small to medium sized businesses hence small businesses are a substantial contributor to economic growth in the united states small business owners enjoy more flexibility and freedom to capitalize on profitable opportunities than their larger business competitors hence they challenge the larger firms to be more efficient which is ultimately beneficial to consumers unfortunately small and medium sized businesses have a very low survival rate sbei 2002 in 2002 on the heels of the 2001 recession there were 550 100 small business births and 584 500 small business terminations both academics and public policy analysts have become increasingly concerned about the success of small businesses recently there has been a surge in small business research particularly surrounding small business credit supply and demand not surprisingly much of the literature has been focused on changes in lending technologies relationship2 versus scored3 information processing technologies soft versus hard 4 loan size considerations 5 and loan type considerations6 as they relate to small business supply and demand however very few have actually examined why small and medium sized businesses have very low survival rates some studies have analyzed the sensitivities of small business administration sba guaranteed loans to macroeconomic changes industry risks maturity structures 3 7 and 15 year maturities as well as lender and debt characteristics e g glennon and nigro 2001 2002 dunsky and pennington cross 2003 meanwhile agarwal chomsisengphet and liu 2003 empirically assessed the significant importance of owner and firm characteristics in determining the risk of small business default while controlling for the macroeconomic and industry risks with bankruptcy filings continuing to rise significantly in recent years many policy makers are turning their attention to bankruptcy laws specifically congress is considering reforming personal bankruptcy laws that if passed will significantly impact the demand for and supply of both consumer credit and small business funding white 2001 concludes that this bankruptcy reform could potentially reduce small business ownership but increase the supply of small business credit and in turn affect the growth of the u s economy small business owners have an incentive to file for personal bankruptcy when their indebtedness exceeds the value of their assets because both their personal and business debts can be discharged 7 though the bankruptcy exemption law is primarily designed for consumers the personal bankruptcy exemption law is a de facto bankruptcy procedure for small business owners because the debt of a noncorporate firm is the personal liability of the entrepreneur owner fan and white 2003 hence investigating the potential impact of the exemption law on small business bankruptcy decisions may provide some insight into how the bankruptcy laws should be reformed further fan and white 2003 argue that while the expected return to creditors should be lower in states with higher exemption level upon small business shutdown it is not entirely clear whether lenders will actually shut down a financially troubled small business while they empirically find that small businesses in high exemption states are more likely to be shut down this positive relationship is statistically insignificant the authors conclude that additional research will be needed to determine if a significant relationship exists p

credit swap valuation this review of the pricing of credit swaps a form of derivative security that can be viewed as default insurance on loans or bonds begins with a description of the credit swap contract turns to pricing by reference to spreads over the risk free rate of par floating rate bonds of the same quality and then considers model based pricing the role of asset swap spreads as a reference for pricing credit swaps is also considered

a multi factor credit migration model for sovereign and corporate debts abstract this paper develops a multi factor markov chain model for rating migrations and credit spreads that is applicable to both sovereign and corporate debts the model s central feature is to allow transition matrices to be time varying and driven by rating specific latent variables which encompass economic factors like the business cycle there are three main contributions first the model incorporates well documented empirical properties of transition matrices such as their dependence on business credit cycles and it also allows for inter rating variations in credit quality changes second instead of focusing solely on empirical modeling of rating transitions the paper also shows how the empirical model can be implemented for actual valuations third the estimation and calibration procedures are easy to follow and implement

the collateral value of fine art in this paper we examine the effect of implicit seller reserves on the estimation of value at risk based on historical asset sales data we direct our examination toward how and whether fine art might prove an appropriate form of loan collateral for banks and other financial institutions using a data set of french impressionist paintings brought to auction from 1985 to 2001 we control for the effect of works that are bought in house to construct a distribution of potential sale values that corrects for sample selection bias it turns out that the downside risk surrounding deviations of auction prices from expert presale estimates depends critically on how buy ins are incorporated if downside risk is assessed solely on historical experience with successful auction sales the data appear to support loan to value ratios between 50 and a 100 larger than loan to value ratios that countenance the existence of seller reserves the auction process however is quantifiable and can reveal the necessary risk information required for loan consideration

economic and regulatory capital allocation for revolving retail exposures abstract we present two internal capital allocation models and compare the capital ratios they generate with those prescribed by the latest revision of basel s new capital accord proposal for advanced retail portfolios which allows for explicit future margin income recognition given a test portfolio of credit card exposures that we assemble we find that basel s ratios are closer to those generated by our models for low credit risk segments we attribute the discrepancies to the different ways basel and our models account for future margin income to basel s assumptions about asset correlations and to one model taking macroeconomic conditions into account

an analytic approach to credit risk of large corporate bond and loan portfolios abstract we derive an analytic approximation to the credit loss distribution of large portfolios by letting the number of exposures tend to infinity defaults and rating migrations for individual exposures are driven by a factor model in order to capture co movements in changing credit quality the limiting credit loss distribution obeys the empirical stylized facts of skewness and heavy tails we show how portfolio features like the degree of systematic risk credit quality and term to maturity affect the distributional shape of portfolio credit losses using empirical data it appears that the basle 8 rule corresponds to quantiles with confidence levels exceeding 98 the limit law s relevance for credit risk management is investigated further by checking its applicability to portfolios with a finite number of exposures relatively homogeneous portfolios of 300 exposures can be well approximated by the limit law a minimum of 800 exposures is required if portfolios are relatively heterogeneous realistic loan portfolios often contain thousands of exposures implying that our analytic approach can be a fast and accurate alternative to the standard monte carlo simulation techniques adopted in much of the literature

non performing loans moral hazard and regulation of the chinese commercial banking system abstract non performing loans npls represent a major obstacle to the development of banking sector one of the key objectives of the banking sector reforms in china has therefore been to reduce the high level of npls to do so chinese regulatory authorities have injected significant capital into the banking system and scrutinized npls since 2003 this paper examines the impact of npls on bank behavior in china using a threshold panel regression model and a dataset covering 60 city commercial banks 16 state owned banks and joint stock banks and 11 rural commercial banks during 2006 2012 we test whether lending decisions of chinese banks exhibit moral hazard the results support the moral hazard hypothesis suggesting that an increase in the npls ratio raises riskier lending potentially causing further deterioration of the loan quality and financial system instability policy implications of findings are evaluated

selecting an optimal portfolio of consumer loans by applying the state preference approach abstract internal models like creditmetrics and kmv implemented by banks to manage credit risk and assess regulatory capital are significant examples of how practitioners apply modern portfolio theory mpt to the management of bank loan portfolios from a theoretical perspective there are several reasons suggesting to be careful in extending mpt to the case of bank loan portfolios selection in order to avoid misleading results specifically loans log returns are non normally distributed random variables furthermore decision makers not necessarily perform a quadratic utility function because both of those reasons the traditional mean variance approach is inadequate in building up optimal loan portfolios such a conclusion is even more relevant if specific categories of loans are considered in our paper we deal with the problem of selecting optimal portfolios of consumer loans by developing a state preference model it allows us not to explicitly consider the distributional properties of loans log returns the model is a static one having the objective to select the loan portfolio maximizing the expected utility of wealth allocated by the bank managers subject to a number of constraints accounting for fundamental strategic choices implemented by the bank managers our results show that flexibility is the main characteristic of our model in fact adding constraints gives new optimal portfolios without reducing the expected utility of the decision maker we will explain that such a result does not depend on constraints misspecification but on the risk structure implied in the state preference approach

the heckscher ohlin and travis vanek theorems under uncertainty abstract the heckscher ohlin theorem is valid under uncertainty of the special benchmark sort modelled by helpman razin their pessimism over its validity is vanquished by more structure rational expectations are imposed on consumers and identical and constant relative aversion to income risk is assumed under these circumstances with free commodity trade the heckscher ohlin theorem holds for the international exchange of equities

credit rationing in the u s mortgage market evidence from variation in fha market shares abstract this paper examines the nature of mortgage credit rationing across geographic markets and time particular attention is paid to the response of conventional mortgage supply to higher risk conditions associated with regional recessions we develop a series of four indirect tests based on the spatial variation of the fha share of mortgages both endorsements and applications as well as fha and conventional rejection rates results of these four tests indicate that conventional mortgage underwriting criteria do not become more flexible and may even become more demanding when local economic conditions deteriorate this result indicates the use of non price credit rationing in the mortgage market and suggests a special role for fha insured mortgages as a mechanism for maintaining mortgage credit supply in declining housing markets

a coupled markov chain approach to credit risk modeling we propose a markov chain model for credit rating changes we do not use any distributional assumptions on the asset values of the rated companies but directly model the rating transitions process the parameters of the model are estimated by a maximum likelihood approach using historical rating transitions and heuristic global optimization techniques we benchmark the model against a glmm model in the context of bond portfolio risk management the proposed model yields stronger dependencies and higher risks than the glmm model as a result the risk optimal portfolios are more conservative than the decisions resulting from the benchmark model

an integrated pricing model for defaultable loans and bonds abstract in recent years credit risk has played a key role in risk management issues practitioners academics and regulators have been fully involved in the process of developing studying and analysing credit risk models in order to find the elements which characterize a sound risk management system in this paper we present an integrated model based on a reduced pricing approach for market and credit risk its main features are those of being mark to market and that the spread term structure by rating class is contingent on the seniority of debt within an arbitrage free framework we introduce issues such as the integration of market and credit risk the use of stochastic recovery rates and recovery by seniority moreover we will characterize default risk by estimating migration risk through a mortality rate actuarial based approach the resultant probabilities will be the base for determining multi period risk neutral transition probability that allow pricing of risky debt in the trading and banking book

effects of heterogeneity on bank efficiency scores bank efficiency estimates often serve as a proxy of managerial skill since they quantify sub optimal production choices but such deviations can also be due to omitted systematic differences among banks in this study we examine the effects of heterogeneity on bank efficiency scores we compare different specifications of a stochastic cost and alternative profit frontier model with a baseline specification after conducting a specification test we discuss heterogeneity effects on efficiency levels ranks and the tails of the efficiency distribution we find that heterogeneity controls influence both banks optimal costs and profits and their ability to be efficient differences in efficiency scores are important for more than only methodological reasons first different ways of accounting for heterogeneity result in estimates of foregone profits and additional costs that are significantly different from what we infer from our general specification second banks are significantly re ranked when their efficiency is estimated with a specification other than the preferred general specification third the general specification gives the most reliable estimates of the probability of distress although differences to the other specifications are low

bank capital requirements for securitized loan pools abstract this paper analyzes the riskiness of credit enhancements offered on securitized pools of commercial and industrial loans it develops a technique for allocating capital to such credit enhancements based on setting the expected value of the credit losses in excess of allocated capital equal to the expected value of losses beyond required capital on the original loan pool the resulting capital allocations are compared with those derived from a more general bank wide capital decision rule as well as newly published agency proposals regarding capital for credit enhancements

the effects of estimation error on measures of portfolio credit risk abstract this paper uses monte carlo simulations to assess the impact of noisy input parameters on the accuracy of estimated portfolio credit risk assumptions about input quality are derived from the distribution of historical sample statistics commonly used in default risk modelling the resulting estimation error in the distribution of portfolio losses is considerable losses that are judged to occur with a probability of 0 3 may actually occur with a probability of 1 the paper also shows that estimation error leads to biases in value at risk estimates and significance levels of backtests the biases can be corrected by analysing predictive distributions which average over the unknown parameter values

why don t lenders renegotiate more home mortgages redefaults self cures and securitization we document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007 having performed payment reducing modifications on only about 3 percent of seriously delinquent loans we show that this reluctance does not result from securitization servicers renegotiate similarly small fractions of loans that they hold in their portfolios our results are robust to different definitions of renegotiation including the one most likely to be affected by securitization and to different definitions of delinquency our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans we use a theoretical model to show that redefault risk the possibility that a borrower will still default despite costly renegotiation and self cure risk the possibility that a seriously delinquent borrower will become current without renegotiation make renegotiation unattractive to investors

theory and evidence on the resolution of financial distress we analyze a financially distressed owner managed project the main results of the model are 1 borrower default is an endogenous response to the anticipated restructuring foreclosure outcome 2 the lender s restructuring foreclosure decision depends critically on the interaction between project value and industry liquidity and 3 the lender waits for the industry to recapitalize before selling assets obtained through foreclosure empirical analysis of a large sample of defaulted commercial real estate loans supports many of the model predictions including restructuring foreclosure outcomes that are consistent with endogenous borrower default and firesale discounts that vary depending on industry market conditions at the time of foreclosure jel g33 copyright 2006 oxford university press

pricing mortgage default and foreclosure delay this paper extends current mortgage pricing models to recognize the impact that delays between default and foreclosure have on the value of default to the borrower and the resulting value of the mortgage to investors the model explicitly captures potential costs through postforeclosure deficiency judgments and benefits in the elimination of negative equity and free rent that must be weighed at the time of default in determining whether the ultimate put option via allowing foreclosure is in the money the results provide policy implications concerning the operation of the fha insurance program copyright 1997 by ohio state university press

on the costs of a bank centered financial system evidence from the changing main bank relations in japan we examine the effects of bank firm relationships on firm performance in japan when access to capital markets is limited close bank firm ties increase the availability of capital to borrowing firms but do not lead to higher profitability or growth the cost of capital of firms with close bank ties is higher than that of their peers this indicates that most of the benefits from these relationships are appropriated by the banks finally the slow growth rates of bank clients suggest that banks discourage firms from investing in risky profitable projects however liberalization of financial markets reduces the banks market power the close relationship between manufacturing firms and financial institutions in japan has recently been at the center of the debate on the appropriate financial system for the reforming economies of eastern europe as opposed to the anglo saxon separation of finance and industry long term ties between main banks and their client firms involving bank loans bank equity holding and some bank appointed personnel which are common in japan and germany have often been described as a growth oriented financial system that could serve the needs of developing and reformed economiies better than anonymous capital markets modeled after the arnerican and british financial systems the claim that close ties between investmentoriented banks and industrial firms could help overcome the difficulties of relative backwardness dates back to gerschenkron 1962 who investigates european development rosovsky 1961 applies gerschenkron s framework to the analysis of japanese growth more recently aoki patrick and sheard 1994 hoshi kashyap and loveman 1994 and teranishi 1993 among others portray the close ties between finance and industry in japan as an important factor in the international competitiveness of modern japanese

estimating the distribution of total default losses on the spanish financial system abstract this paper quantifies the credit risk loss distribution of the spanish financial system by introducing a general monte carlo importance sampling is approach we start obtaining all the required information for the standard credit risk model then we quantify the loss distribution under the standard is method and allocate the total risk over the different institutions in the spanish financial system we extend the current is framework to deal with more general assumptions like random recoveries and market valuation we also study the variability of the risk measures over the business cycle and the possible variability due to the model parameters uncertainty our results show that this approach can be very useful for banking supervisors from a macroprudential point of view and that the risk allocation can vary considerably depending on the valuation model under analysis

risk based capital requirements for mortgage loans abstract we contribute to the debate over the reform of the basel accord by developing risk based capital requirements for mortgage loans held in portfolio by financial intermediaries our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification hence rules that offer little risk differentiation including the current basel i regime and standardized approach proposed in basel ii result in significant divergence between regulatory and economic capital these results highlight the incentive problems inherent in simplified methods of capital regulation

the underwriting experience of commercial bank affiliates prior to the glass steagall act a reexamination of evidence for passage of the act abstract we examine a major rationale for the passage of the glass steagall act separating commercial and investment banking activities in the u s that these banks abused their superior knowledge by misrepresenting the quality of inferior security issues or passing off bad commercial loans through publicly offered security issues this issue is of current interest even in today s more relaxed environment in the u s and in the universal banking system in europe since there are still lingering doubts that such abuses will not recur in a systematic study of the performance of bond issues underwritten by different classes of underwriters prior to the passage of the glass steagall act we find bank affiliate issue default rates were lower ex ante yields were lower ex post prices were higher and the relative ability of ex ante yields to predict ex post performance no different than investment bank issues the results hold for all categories of bond issues domestic corporate foreign corporate and foreign governments we have also isolated the performance of the bonds underwrit national city company and chase securities corporation which were targets of the pecora hearing these two bank affiliates were found to issue bonds of lesser quality than the other bank affiliates but no worse than those of the investment banks

financing technology based small firms in europe what do we know this paper reviews the evidence on financing technology based small firms tbsfs in europe european tbsfs finance new investments by relying primarily on internal funds due to capital market failures induced by asymmetric information european venture capital has caught up with us venture capital but this is mainly because of the growth in uk venture investments it is unclear whether european venture capital has been able to certify the quality and enhance the growth of funded companies compared with the nasdaq there is little development of trading in high tech stocks in europe the so called new markets established in the 1990s collapsed in the wake of the internet bubble crash public venture capital and research and development r d tax incentives seem to have positively affected high tech firms

credit risk drivers evaluating the contribution of firm level information and of macroeconomic dynamics abstract understanding if credit risk is driven mostly by idiosyncratic firm characteristics or by systematic factors is an important issue for the assessment of financial stability by exploring the links between credit risk and macroeconomic developments we observe that in periods of economic growth there may be some tendency towards excessive risk taking using an extensive dataset with detailed information for more than 30 000 firms we show that default probabilities are influenced by several firm specific characteristics when time effect controls or macroeconomic variables are also taken into account the results improve substantially hence though the firms financial situation has a central role in explaining default probabilities macroeconomic conditions are also very important when assessing default probabilities over time

exchange rate variability and asset trade in popular discussion about the merits of different international monetary arrangements it is often maintained that increased exchange rate variability has a negative influence on international tra

the influence of foreclosure delays on borrowers default behavior this paper conducts loan level analysis to investigate the influence of expected foreclosure delay on a borrower s default propensity we include the actual foreclosure times in the analysis to capture the dynamic nature of foreclosure duration consistent with theoretical predictions we find a statistically and economically significant impact of foreclosure delay on borrower default behavior in the current market condition where many borrowers have negative equity the increase in delay may make default an optimal choice for more borrowers the negative effect of increased foreclosure delay may need to be considered when devising policies to aid troubled borrowers

loss given default of residential mortgages in a low ltv regime role of foreclosure auction process and housing market cycles abstract using loan level foreclosure auction data we study the loss given default lgd of defaulted residential mortgages originated in korea a low ltv regime we find that senior mortgages generate very low loss rates 5 10 while losses of subordinated claims are in 30 50 range we document the effects of housing market cycles on loss severity by showing that collateral characteristics that are overvalued during the boom increase loss severity during the market downturn we also investigate how a broad set of time of origination and post origination information on loan collateral and borrower characteristics and foreclosure auction process influence the lgd of residential mortgages

cyclical correlations credit contagion and portfolio losses abstract we model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes cyclical correlation is due to the dependence of firms on common economic factors contagion is associated with the local interaction of firms with their business partners we provide an explicit normal approximation of the distribution of portfolio losses we quantify the relation between the variability of global economic fundamentals strength of local firm interaction and the fluctuation of losses we find that cyclical oscillations in fundamentals dominate average losses while local interaction causes additional fluctuations of losses around their average the strength of the contagion induced loss variability depends on the complexity of the business partner network

explaining the absence of international factor price convergence abstract as capital markets have become integrated factor prices have not converged as expected this paper provides an explanation the key observation is that non specific output risks are borne by capital making international portfolio diversification a dominant strategy capital market integration can elicit many patterns of factor price response under this circumstance factor prices will move in parallel if countries are identical when countries differ factor prices may diverge or even have their relative sizes reversed the integration of capital markets affects welfare through changes in risk and in overall returns to savings welfare need not improve

credit risk in the leasing industry abstract this paper is devoted to the credit risk modeling issues of retail lease portfolios using a re sampling method i estimate the probability density function of losses and var measures in a portfolio of 46 732 leases issued between 1990 and 2000 by a major european financial institution my results show that physical collaterals play a major role in reducing the credit risk associated with lease portfolios however because of insufficient recognition of such collaterals under the new regulatory capital framework basel ii significant differences are observed between the estimated capital requirements and those calculated in accordance with the various basel ii approaches

valuing commercial mortgages an empirical investigation of the contingent claims approach to pricing risky debt this paper empirically investigates a contingent claims model of commercial mortgage pricing we find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent claims model in addition the model explains a significant proportion of the period to period changes in the default premia however given an assumed negative correlation between building value changes and interest rate changes the model s risk structure tends to increase less steeply with increasing maturity than the observed risk structure since the seminal work of black and scholes 1973 corporate liabilities have been modeled as options on the total value of the firm this contingent claims approach to bond pricing was refined by merton 1974 to allow for cash dispersals prior to the bonds maturities and by brennan and schwartz 1980 and ingersoll 1987 to allow for interest rate uncertainty although variants of these bond pricing models are currently being used extensively on wall street they have not been tested extensively moreover empirical studies have not successfully accounted for the observed spread between the rates on risky and default free debt jones mason and rosenfeld 1984 empirically investigate a model that assumes a nonstochastic term structure of interest rates while ramaswamy and sundaresan 1986 examine a model with stochastic interest rates to price floating rate notes in both cases the models could not explain the observed default premia the relative lack of empirical analysis is due partly to the complicated nature of corporate bonds major corporations generally have a large number of different bond issues outstanding that have different priorities in the event that the firm goes bankrupt moreover the bonds can have a variety of covenants specifying sinking fund provisions conditions under which technical default will occur and other restrictions that can have an impact on their value although these complications do not preclude pricing various bond issues on a case by case basis they make it difficult to test systematically the accuracy of the pricing model

optimal mortgage design this article studies optimal mortgage design in a continuous time setting with volatile and privately observable income costly foreclosure and a stochastic market interest rate we show that the features of the optimal mortgage are consistent with an option adjustable rate mortgage option arm under the optimal contract the borrower is given discretion of how much to repay until his balance reaches a certain limit the default rates and interest rate payment on the mortgage correlate positively with the market interest rate gains from using the optimal contract relative to simpler mortgages are the biggest for those who face more income variability buy pricey houses given their income level or make little or no down payment our model thus may help to explain a high concentration of option arms among riskier borrowers jel g20 g21 g33

courts and banks effects of judicial enforcement on credit markets the cost of enforcing contracts is a key determinant of market performance we document this point with reference to the credit market in a model of opportunistic debtors and inefficient courts according to the model improvements in judicial efficiency should reduce credit constraints and increase lending with an ambiguous effect on interest rates that depends on banking competition and on the type of judicial reform these predictions are supported by panel data on italian provinces in provinces with longer trials or large backlogs of pending trials credit is less widely available

evaluating credit risk models over the past decade commercial banks have devoted many resources to developing internal models to better quantify their financial risks and assign economic capital these eaorts have been recognized and encouraged by bank regulators recently banks have extended these eaorts into the field of credit risk modeling however an important question for both banks and their regulators is evaluating the accuracy of a model s forecasts of credit losses especially given the small number of available forecasts due to their typically long planning horizons using a panel data approach we propose evaluation methods for credit risk models based on cross sectional simulation specifically models are evaluated not only on their forecasts over time but also on their forecasts at a given point in time for simulated credit portfolios once the forecasts corresponding to these portfolios are generated they can be evaluated using various statistical methods 2000 elsevier science b v all rights reserved

internal ratings systems implied credit risk and the consistency of banks risk classification policies abstract this paper aims at improving our understanding of internal risk rating systems irs at large banks of the way in which they are implemented and at verifying if irs produce consistent estimates of banks loan portfolio credit risk an important property of our work is that the size of our data set allows us to derive measures of credit risk without making any assumptions about correlations between loans by applying carey s carey mark 1998 credit risk in private debt portfolios journal of finance liii 4 1363 1387 non parametric monte carlo re sampling method we find substantial differences between the implied loss distributions of two banks with equal regulatory risk profiles both expected losses and the credit loss rates at a wide range of loss distribution percentiles vary considerably such variation will translate into different levels of required economic capital our results also confirm the quantitative importance of size for portfolio credit risk for common parameter values we find that tail risk can be reduced by up to 40 by doubling portfolio size our analysis makes clear that not only the formal design of a rating system but also the way in which it is implemented e g a rating grade composition the degree of homogeneity within rating classes can be quantitatively important for the shape of credit loss distributions and thus for banks required capital structure the evidence of differences between lenders also hints at the presence of differentiated market equilibria that are more complex than might otherwise be supposed different lending or risk management styles may emerge and banks strike their own balance between risk taking and the cost of monitoring that risk

long lasting bank relationships and growth of firms a puzzling but consistent result in the empirical literature on banking is that firms with close bank ties do not grow faster than bank independent firms in this paper we reconsider the link between relationship lending and firm growth distinguishing firms by size and expansion contraction conditions the idea is that the beneficial effects of relationship lending on information asymmetries can be compensated by other negative capture risk and externality effects which make relational banks reluctant to support long term growth projects of client firms and that the strength of these compensating effects varies with firm size and health status we explore the influence of long lasting bank relationships on employment and asset growth of a large sample of italian firms the main finding is that relationship lending hampers the efforts of small firms to increase their size while it mitigates the negative growth of troubled medium large enterprises

the domino effect of credit defaults test of asymmetric default correlations using realised default data using the research framework of a domino effect in firms we first make theoretical contributions by addressing several testable hypotheses regarding asymmetrical default correlations we then employ lucas s method to provide empirical evidence based on realised historical default data in the united states from 1992 to 2013 our empirical results are consistent with the following notions first default correlations increase with the time horizon second firms with low credit quality small size illiquidity and a high beta exhibit higher default correlations credit risk management without considering asymmetrical default correlations could underestimate portfolio risk due to default clustering

var and expected shortfall in portfolios of dependent credit risks conceptual and practical insights in the first part of this paper we address the non coherence of value at risk var as a risk measure in the context of portfolio credit risk and highlight some problems which follow from this theoretical deficiency in particular a realistic demonstration of the non subadditivity of var is given and the possibly nonsensical consequences of var based portfolio optimisation are shown the second part of the paper discusses var and expected shortfall estimation for large balanced credit portfolios all standard industry models creditmetrics kmv creditrisk are presented as bernoulli mixture models to facilitate their direct comparison for homogeneous groups it is shown that measures of tail risk for the loss distribution may be approximated in large portfolios by analysing the tail of the mixture distribution in the bernoulli representation an example is given showing that for portfolios of lower quality choice of model has some impact on measures of extreme risk 2002 elsevier science b v all rights reserved

credit risk models and agricultural lending credit risk models are developed and used to estimate capital requirements for agricultural lenders under the new basel capital accord the study uses credit value at risk methods to calculate probability of default loss given default and expected and unexpected losses two applied models creditmetrics and moody s kmv are estimated using farm financial data the results show that the necessary capital for agricultural lenders under the new basel accord varies substantially depending on the riskiness and granularity of the portfolio

risk sharing and industrial specialization regional and international evidence the authors provide empirical evidence that risk sharing enhances specialization in production to the best of their knowledge this well established and important theoretical proposition has not been tested before the empirical procedure is summarized as follows first the authors construct a measure of specialization in production and calculate an index of specialization for each of the european community ec and non ec oecd countries u s states canadian provinces japanese prefectures latin american countries and regions of italy spain and the united kingdom then they estimate the degree of capital market integration a measure of risk sharing within each of these groups of regions the ec countries the non ec oecd countries the united states canada japan italy spain and the united kingdom and rely on another author s estimate for latin america finally they perform a regression of the specialization index on the degree of risk sharing controlling for relevant economic variables they find a positive and significant relation between the degree of specialization of individual members of a group of countries provinces states or prefectures and the amount of risk that is shared within the group the authors perform regressions using variables such as shareholder rights and the size of the financial sector relative to gdp as instruments for the amount of inter regional risk sharing these regressions confirm that risk sharing facilitated by a favorable legal environment and a developed financial system is a direct causal determinant of industrial specialization this abstract was borrowed from another version of this item

mortgage default and possession under recourse a competing hazards approach recent studies by ambrose buttimer and capone have stressed the fact that lender and borrower decisions after the initial default on amortgage may significantly affect the amount and timing of recoveries and hence more broadly the value and riskiness of mortgage loan portfolios this study uses microeconomic data from the uk to examine the timing decisions of mortgage lenders and borrowers when mortgages are in default the results suggest that salary and interest rates influence timing decisions more than loan to value ratios do and that lenders and borrowers accelerate the resolution of delinquent mortgages as the economic climate deteriorates