an analysis of default risk in mobile home credit abstract there are approximately us 22 billion in outstanding receivables and an active secondary market for mobile home credit in the united states this important segment of the financing industry shares some attributes with traditional home mortgage financing and other attributes with consumer credit in this paper we draw on the mortgage literature to postulate the determinants of default risk for mobile home loans using multivariate logit models we investigate the relevance of payment history loan terms borrower characteristics economic conditions and legal constraints in analyzing loan defaults and delinquencies payment history emerges as the overwhelming factor in predicting the likelihood of default

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

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

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

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

how risk sharing may enhance efficiency of english auctions we investigate the possibility of enhancing efficiency by awarding premiums to a set of highest bidders in an english auction in a setting that extends maskin and riley 1984 econometrica 52 1473 1518 in three aspects i the seller can be risk averse ii the bidders can have heterogeneous risk preferences and iii the auction can have a binding reserve price our analysis reveals that the premium has an intricate joint effect on risk sharing and expected revenue which in general benefits risk averse bidders when the seller is more risk averse than the pivotal bidder a condition often verifiable by deduction prior to the auction the premium also benefis the seller and therefore leads to a pareto improvement of the english auction the advantage of such premium tactics is directly related to a the seller s degree of risk aversion b the reserve price c the riskiness of the object for sale d the degree of heterogeneity in risk preferences among the bidders and e the number of the potential bidders

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

banker judgement versus formal forecasting models the case of country risk assessment abstract the allocation of credit to less developed countries depends upon lenders judgements of country risk research in psychology suggests that human judgement may be prone to bias this paper uses the institutional investor country credit ratings as indicators of banker judgement in terms of their ability to predict the emergence of arrears on external debt service it is shown that bankers are overly pessimistic about the creditworthiness of less developed countries multivariate statistical models have a higher overall predictive accuracy although they may arguably be outperformed by banker judgement when allowance is made for the differential costs of type i and type ii errors

sovereign bond yield spreads and sustainability an empirical analysis of oecd countries abstract we study whether and how a country s environmental social and governance esg performance relates to its sovereign borrowing costs in international capital markets we hypothesize that good esg performance plays an economic role it signals a country s commitment to sustainability and long term orientation and is a buffer against negative shocks leading to lower sovereign bond yield spreads using a sample of 20 oecd countries over the period 1996 2012 we show that countries with good esg performance are associated with lower default risk and lower sovereign bond yield spreads moreover we show that the social and governance dimensions have a significant negative association with sovereign bond yield spreads whereas the environmental dimension does not

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

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

nonparametric estimation of utility function in first price sealed bid auctions i propose a simple method to nonparametrically estimate the utility function in first price sealed bid auctions when bidders participation is exogenous using a pair of bid densities each for a different number of bidders i establish a contraction mapping that converges to the true utility function the method employs nonparametric estimates in place of the true bid densities to construct the contraction mapping and computes the utility function by iterating the contraction operator a monte carlo study shows that the method approximates the true utility function and valuation density

risk aversion and optimal reserve prices in first and second price auctions abstract we analyze the effects of buyer and seller risk aversion in first and second price auctions in the classic setting of symmetric and independent private values we show that the seller s optimal reserve price decreases in his own risk aversion and more so in the first price auction the reserve price also decreases in the buyers risk aversion in the first price auction thus greater risk aversion increases ex post efficiency in both auctions especially that of the first price auction at the interim stage the first price auction is preferred by all buyer types in a lower interval as well as by the seller

the effect of transaction size on off the run treasury prices this paper examines intra day trading data from the inter dealer broker market for u s treasury securities and measures the degree of price pressure in the off the run treasury market as is well known securities that would appear to be very close substitutes i e on the run and off the run treasury bonds behave as if there is some degree of market segmentation this is the first systematic study of the off the run treasury note and bond market focused entirely on a price pressure effect using intra day data the paper analyzes price pressure through matched pairs of securities that differ only in liquidity

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

a note on the use of industry relative ratios in bankruptcy prediction abstract the potential for industry relative financial ratios to improve the prediction of firms in financial distress motivated this comparison of model specifications based on either unadjusted or industry relative ratios both specifications yielded stable parameter estimates over the time periods examined however the industry relative specification appeared to add incremental information not contained in the model based on the unadjusted financial ratios the converse case did not hold in addition with the industry relative specification ex post forecast accuracy was slightly improved relative to the ex ante forecast while with the unadjusted model specification ex post forecast accuracy declined from that obtained ex ante

why democracies may actually be less reliable allies recent research builds on the observation that democracies have more durable alliances to argue that democracies make more reliable allies this need not be the case alliances serve as commitment devices adding ex ante credibility to states claims about ex post behavior variation in alliance durability must reflect differences in the desirability of formalizing alignments put simply democracies are most improved by formal commitments we offer two related explanations for why democracies might actually be less reliable alliance partners information costs for participating in policymaking and the advantages of organized interest groups combined with distributional incentives generated by the periodic turnover of governments may conspire to make informal commitments on the part of democracies problematic determining the net effect of democratic virtue and vice is best done empirically we test alliance reliability by focusing on intervention rather than on the duration or the number of commitments our results suggest that democracies make less reliable allies

the impact of default risk on the prices of options and other derivative securities abstract this paper presents a model for valuing derivative securities when there is default risk the holder of a security is assumed to recover a proportion of its no default value in the event of a default by the counterparty both the probability of default and the size of the proportional recovery are random the paper shows how data on bonds issued by the counterparty can be used to provide information about model parameters

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

uniqueness of equilibrium in sealed high bid auctions abstract for the case of two buyers we show that equilibrium in the sealed high bid auction is unique when i buyers reservations prices are drawn independently from distributions with finite support and positive mass at the lower endpoint ii buyers have private values and iii buyers preferences are log supermodular for more than two buyers we obtain the same result under the additional assumptions that iv buyers with the same reservation price have the same preferences v buyers are risk neutral or risk averse with non increasing absolute risk aversion and vi the supports of the different buyers distributions of reservation prices have the same upper endpoint

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

chain gangs and passed bucks predicting alliance patterns in multipolarity contemporary balance of power theory has become too parsimonious to yield determinate predictions about state alliance strategies in multipolarity kenneth waltz s theory predicts only that multipolarity predisposes states to either of two opposite errors which this article characterizes as chain ganging and buck passing to predict which of these two policies will prevail it is necessary to complicate waltz s theory by adding a variable from robert jervis s theory of the security dilemma the variable of whether offense or defense is perceived to have the advantage at least under the checkerboard geographical conditions in europe before world wars i and ii perceived offensive advantage bred unconditional alliances whereas perceived defensive advantage bred free riding on the balancing efforts of others

testing alternative models of alliance duration 1816 1984 theory at least four models of alliance duration exist namely the capabilityaggregation security autonomy domestic politics and institutionalization models of alliances the independent tests of these models have been underspecified however as no simultaneous comparative testing of the hypotheses from these models has been conducted hypothesis alliance duration may be a function of security threats changes in national capabilities the security autonomy tradeoffs between larger and smaller states in an alliance regime type and changes in regime and the time the alliance has had to become institutionalized methods a hazard model employing time varying covariates applied to 207 alliances from 1816 to 1984 results key elements of the security autonomy and domestic politics models have effects on alliance duration as expected it does not appear however that institutionalization over time has an effect on alliance duration as alliances appear to become more likely to dissolve the longer they last additionally while one hypothesis advanced by the capability aggregation model receives some support a second variable is statistically significant in the opposite direction of the model s expectation suggesting possible problems with the model s validity

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

original issue high yield bonds aging analyses of defaults exchanges and calls this paper presents an aging analysis of 741 high yield bonds and finds default exchange and call percentages substantially higher than reported in earlier studies by december 31 1988 cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979 1983 and from 3 to 9 percent for issue years 1984 1986 exchanges are also a significant factor although they often are followed by default moreover a significant percentage of high yield debt 26 47 percent for 1977 1982 has been called by december 31 1988 approximately one third of the bonds issued in 1977 1982 has defaulted or been exchanged and an additional one third had been called on average only 28 percent of these issues are still outstanding there is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982

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

forecasting losses on a liquidating long term loan portfolio abstract assessing the condition of financial institutions and valuation of loan portfolios in secondary markets require the estimation of exposure to losses on existing portfolios of long term loans data from a major u s financial institution were used to construct a forecasting model with markovian structure and nonstationary transition probabilities the model proved to be effective in representing changes in probability of default that occur as individual loans mature and accurate in forecasting aggregate defaults and losses on a nationwide portfolio of long term loans

the underpinnings of country risk assessment abstract this paper surveys the history and current status of country risk assessment the motivation is to understand why it is that country risk assessors have such a poor track record in anticipating the onset of financial crises the development of the field reflects changes in the composition of international capital flows these changes have confounded a definition of country risk especially if a definition is centered on a particular event it is then argued that the field has reached an impasse and this impasse is related to the methods of abstraction and the current crisis of vision within the science of economics this crisis of vision as it pertains to theories of financial crises has led to increased reliance on quantitative methods in the field of country risk the paper concludes by proposing a new direction for the field the first step towards which is to recognize that the object of country risk assessment is not to monitor for a particular event or symptom of financial crisis but rather to monitor for a particular state of the economy

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

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

optimal reservation prices in auctions the risk neutral independent private values ipv auction model produces curious results regarding the use of reservation prices no matter how many bidders the seller should announce a fixed reservation price above his true value this is notable since the seller gains by adopting an inefficient institution and puzzling because it conflicts with common practice the authors relax the ipv assumption characterize optimal reservation prices in a richer class of auctions and show that when information is correlated the seller s optimal reservation price converges to his true value often monotonically and rapidly as the number of bidders grows copyright 1996 by royal economic society

ratings assignments lessons from international banks this paper estimates ordered logit and probit regression models for bank ratings which also include a country index to capture country specific variation the empirical findings provide support to the hypothesis that the individual international bank ratings assigned by fitch ratings are underpinned by fundamental quantitative financial analyses also there is strong evidence of a country effect our model is shown to provide accurate predictions of bank ratings for the period prior to the 2007 2008 banking crisis based upon publicly available information however our results also suggest that quantitative models are not likely to be able to predict ratings with complete accuracy furthermore we find that both quantitative models and rating agencies are likely to produce highly inaccurate predictions of ratings during periods of financial instability

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

regime change and the restructuring of alliances morrow 1991 claims that alliances can shift because of changes in the policy preferences of the regimes that control states this is counter to the central theoretical position of neorealist theory that sees alliances as the outgrowth of particular distributions of power in an anarchic international system drawing on regime changes in europe between 1816 and 1965 we evaluate the relative merits of these contradictory claims our data support the conclusion that regime changes that were 1 externally imposed 2 the result of internal revolution or 3 nonviolent but occurred in the context of an internal political crisis all had significant effects on a state s restructuring of its alliances even when other variables such as changes in the distribution of power and the state s power status are held constant

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

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

capital requirements and bank behavior in the uk are there lessons for international capital standards abstract the financial crisis prompted widespread interest in developing a better understanding of how capital regulation drives bank behavior this paper uses a unique comprehensive database of regulatory capital requirements on all uk banks to examine their effects on capital lending and balance sheet management behavior we find that capital requirements that include firm specific time varying add ons set by supervisors affect banks desired capital ratios and that resulting adjustments to capital and lending depend on the gap between actual and target ratios we use these results to measure the effects of a capital regime that includes features similar to those embedded in the uk framework our results suggest that countercyclical capital requirements may be less effective in slowing credit activity when banks can readily satisfy them with lower quality lower costing capital elements versus higher quality common equity given the size of the uk banking sector and the global nature of many of the largest institutions in the uk banking sector the results have implications for the ongoing debate surrounding the design and calibration of international capital standards

alliance reliability in times of war explaining state decisions to violate treaties understanding the conditions under which state leaders are willing to honor alliance commitments in war will increase knowledge about the escalation and diffusion of conflict and about the propensity of states to fulfill agreements under anarchy new data analysis provides evidence that alliance commitments are fulfilled about 75 percent of the time but how can one understand the failure of alliance partners to act as promised in the remaining 25 percent of cases formal modelers have deduced that because of the costs associated with alliances state leaders who form alliances are likely to fulfill them those alliances that are formed should be fairly reliable i argue therefore that one can best account for violations of alliance agreements either through an understanding of the factors that reduce the costs of violation or through changes that have occurred since the alliance was formed using detailed data on alliance commitments between 1816 and 1944 i find evidence commensurate with this argument changes in the power of states or in their policymaking processes are powerful predictors of the failure to honor past commitments and nondemocratic states and major powers sets of states that i argue suffer lower costs from reneging on agreements are more likely to violate treaties

how bidder s number affects optimal reserve price in first price auctions under risk aversion this paper shows that in the classic symmetric and independent private value environments the seller s optimal reserve price is a decreasing function of the number of bidders in the first price auctions when the seller and or buyers are risk averse

empirical credit cycles and capital buffer formation abstract we model 1927 1997 us business failure rates using an unobserved components time series model clear evidence is found of cyclical behavior in default rates we also detect significant longer term movements in default rates and default correlations in a multi year backtest experiment we show that accommodation of default rate dynamics has important consequences for credit risk capitalization requirements static or myopic variants of credit portfolio models miss significant periods of credit risk accumulation empirically congruent dynamic models by contrast provide more timely warning signals of credit risk build up in this way they may mitigate some of the pro cyclicality concerns

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

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

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

applying portfolio theory to global bank lending abstract portfolio theory provides some insights into how a bank should manage its global exposures practical application of some of the principles of portfolio analysis is possible if comparable credit ratings are available and if the impact on each loan s rating of likely future events can be assessed if further restrictive assumptions are made about which quality dimensions of the portfolio are more important and how much more important and if judgements can be quantified about what risk return tradeoffs are acceptable then it is possible to derive measures to guide exposure and pricing decisions this article is related to the other papers in this special issue in that country and corporate risk assessment methodologies can provide important inputs into the portfolio analysis this paper however attempts to go beyond the evaluation of risk at the level of individual companies countries or other loan customers and to focus instead on the problem of managing the riskiness of the overall bank loan portfolio

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

the foreign imposition of domestic institutions international relations research has paid little attention to why states often spend precious resources building and maintaining domestic institutions in other states i identify 198 cases of forcible domestic institutional promotion the most costly form of such interventions between 1555 and 2000 i note several patterns in the data these interventions come in three historical clusters they are carried out by states of several regime types states engage in the practice repeatedly target states tend to be undergoing internal instability states tend to promote their own institutions and targets tend to be of strategic importance the most intensive periods of promotion coincide with high transnational ideological tension and high international insecurity i argue that these two conditions interact forcible promotion is most likely when great powers 1 need to expand their power and 2 find that by imposing on in smaller states those institutions most likely to keep their ideological confreres in power they can bring those states under their influence although in periods of high insecurity domestic variables alone may account for institutional impositions such impositions may nonetheless extend the promoting states influence and thereby alter the balance of international power

a factor analytic approach to bank condition abstract this paper explores a new approach to early warning systems for commercial banks factor analysis and logit estimation are used to measure the condition of individual institutions and to assign each of them a probability of being a problem bank the model employs widely used financial ratios and information taken from bank examinations the factors produced by the model for use in the logit estimation are very similar to the camel rating system used by bank examiners empirical results show that the combination of factor analysis and logit estimation is a promising method of evaluating bank condition

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

the probability of bankruptcy a comparison of empirical predictions and theoretical models abstract the last decade has witnessed the development of many empirical models to predict corporate bankruptcy and of several bankruptcy theories this paper reviews and integrates these two strands of research and finds a substantial amount of overlap however the overlap is not perfect the paper presents a new theory of bankruptcy that appears to fit the data better the paper also suggests directions for future empirical and theoretical research