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CFR
Working Paper Series 2009
The CFR sponsors original research on issues associated with deposit insurance, banking performance, risk measurement and management, corporate finance, and financial policy and regulation. The results of CFR-sponsored research, FDIC staff research, and other invited papers on these CFR research lines appear in the CFR Working Paper Series.
Working Paper Series:
2009
2008
2007
2006
2005
2004
| Working Paper Number | Title |
| 2009-10 |
How Well Does the Vasicek-Basel AIRB Model Fit the Data? Evidence from a Long Time Series of Corporate Credit Rating Data
Paul H. Kupiec
|
| 2009-09 |
More Powerful Unit Root Tests with Non-normal Errors
Kyung So Im, Junsoo Lee, Margie Tieslauh |
| 2009-08 |
Speculation and Recent Volatility in the Price of Oil
James Einloth |
| 2009-07 |
The Effect of Bank Account Ownership on Credit, Consumption, and Savings: Evidence from the United Kingdom
Katie Fitzpatrick |
| 2009-06 |
Bank Failures and the Cost of Systemic Risk: Evidence from 1900-1930
Paul Kupiec and Carlos Ramirez |
| 2009-05 |
Implied Recovery
Sanjiv R. Das and Paul Hanouna |
| 2009-04 |
Do Financial Counseling Mandates Improve Mortgage Choice and Performance? Evidence from a Natural Experiment
Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, and Douglas D. Evanoff
|
| 2009-03 |
Pay for Performance? CEO Compensation and Acquirer Returns in BHCs
Kristina Minnick, Haluk Unal, Liu Yang
|
| 2009-02 |
Evidence of Improved Monitoring and Insolvency Resolution after FDICIA
Edward J. Kane, Rosalind L. Bennett, Robert C. Oshinsky
|
| 2009-01 |
The $700 Billion Bailout: A Public-Choice Interpretation
Carlos D. Ramirez |
How Well Does the Vasicek-Basel AIRB Model Fit the Data? Evidence from a Long Time Series of Corporate Credit Rating Data - PDF
517 KB (PDF Help)
FDIC Center for Financial Research Working Paper No. 2009-10
Paul H. Kupiec
November 2009
ABSTRACT
I develop methods that produce consistent estimates of the Vasicek-Basel IRB (VAIRB)
credit risk model parameters. I apply these methods to Moody’s data on corporate
defaults over the period 1920–2008 and assess the model fit and construct hypothesis
tests using bootstrap methods. The results show that the VAIRB does not capture the
variability in Moody’s default data: there are numerous episodes in which obligors
default with much greater frequency than predicted. This pattern is consistent with a
missing common factor that affects default correlation only intermittently—a missing
factor similar to the frailty covariate in Duffie et al. (2009). Unlike Lopez (2004), I find
the VAIRB correlation parameter to be larger for lower-rated credits. I use estimates of
the VAIRB error distribution to construct capital allocations for model risk and find that
the capital buffers for model risk are substantial, especially for lower-graded credits.
VAIRB common factor estimates exhibit positive autocorrelation and thus long time
series are usually necessary to produce reliable model estimates. Alternatively, I use
common factor and correlation parameter estimates from the 1920-2008 data to control
for common factor realizations when estimating unconditional default rates (PDs) from
short samples. I estimate PDs and confidence intervals using default data for Moody’s
alpha-numeric rating grades (1998-2008). After correcting for common factor effects,
sample average default rates are shown to overstate the PD for most credit grades in this
sample period.
Keywords:
JEL
codes:
More Powerful Unit Root Tests with Non-normal Errors - PDF
893 KB (PDF Help)
FDIC Center for Financial Research Working Paper No. 2009-9
Kyung So Im, Junsoo Lee, Margie Tieslau
November 2009
ABSTRACT
This paper proposes new unit root tests that are more powerful when the error term follows a non-normal distribution. The improved power is gained by utilizing the additional moment conditions embodied in non-normal errors. Specifically, we follow the work of Im and Schmidt (2008), using the framework of generalized methods of moments (GMM), and adopt a simple two-step procedure based on the "residual augmented least squares" (RALS) methodology. Our RALS-based unit root tests make use of non-linear moment conditions through a computationally simple procedure. Our Monte Carlo simulation results show that the RALS-based unit root tests have good size and power properties, and they show significant efficiency gains when utilizing the additional information contained in non-normal errors---information that is ignored in traditional unit root tests.
Keywords: Unit root test, Generalized methods of moments (GMM), Residual augmented least squares (RALS), Non-normality.
JEL
codes: C22, C12, C13.
Speculation and Recent Volatility in the Price of Oil - PDF
934 KB (PDF Help)
FDIC Center for Financial Research Working Paper No. 2009-8
James Einloth
October 2009
ABSTRACT
As the price of crude oil doubled from June 2007 to June 2008, suspicion grew that price was being driven higher by speculation rather than fundamental supply and demand. After having seen the price drop 70 percent from its peak, this explanation may appear more plausible than ever. This paper introduces a new methodology that uses convenience yield – imputed from futures prices – to detect the influence of speculation on the spot price of a storable commodity. The paper finds the evidence inconsistent with speculation having played a major role in the rise of price to $100 per barrel in March 2008. However, the evidence suggests that speculation did play a role in its subsequent rise to $140. Finally, the analysis finds that the collapse in price was caused by an unanticipated decline in demand rather than by speculators unloading their positions. This implies that, absent the discovery of vast new sources of energy, high oil prices will return with the recovery of the global economy.
Keywords: oil, petroleum, futures price, speculation, convenience yield, bubble
JEL
codes: G13, Q33, Q40
The Effect of Bank Account Ownership on Credit, Consumption, and Savings: Evidence from the United Kingdom - PDF
1.03MB (PDF Help)
FDIC Center for Financial Research Working Paper No. 2009-7
Katie Fitzpatrick
September 2009
ABSTRACT
I use an electronic transfer mandate in the UK Child Benefit program, a transfer received by virtually all families with children, to estimate the effect of bank account ownership on the financial behavior of less educated families with children. With the mandate increasing account ownership by as much as 29 percent for less educated families with children, it provides an exogenous increase in account ownership to examine the causal effect of bank account ownership on access to credit, purchase of household durable goods, vehicle ownership, vehicle purchase, and accumulation of financial assets. When a less educated family becomes an owner of a bank account, I find a 71 percentage point increase in the probability of owning a credit card, an increase of 1.4 household durable goods, and no change in vehicle ownership or purchase. Although I find that bank account ownership does not affect the mean level of financial assets, I do find evidence suggestive of an increase in the top half of the financial asset distribution which indicates that there may be heterogeneity in the savings response to owning a bank account. Overall, my findings suggest that the most important benefit of owning a bank account is access to credit and requiring lower income families to own a bank account will not reverse their low average savings levels in the short run.
Keywords: Consumer Finance, Savings, Consumer Credit, Household Finance, Unbanked
JEL
Classification: D6, D14, G21, H3
Bank Failures and the Cost of Systemic Risk: Evidence from 1900-1930
2,017k (PDF Help)
FDIC Center for Financial Research Working Paper No. 2009-6
Paul Kupiec and Carlos Ramirez
April 2009
ABSTRACT
This paper investigates the effect of bank failures on economic growth using data from 1900 to 1930, a period that predates active government stabilization policies and includes periods of banking system distress that are not coincident with recessions. Using both VAR and a difference-in-difference methodology that exploits the reactions of the New York and Connecticut economies to the Panic of 1907, we estimate the effect of bank failures on economic activity. The results indicate that bank failures reduce subsequent economic growth. Over this period, a 0.14 percent (1 standard deviation) increase from the mean value of the liabilities of the failed depository institutions results in a reduction of 17 percentage points in the growth rate of industrial production and a 4 percentage point decline in real GNP growth. The reductions occur within three quarters of the initial bank failure shock and can be interpreted as an important component of the cost of systemic risk in the banking sector.
Keywords: bank failures; systemic risk; financial accelerator, vector auto regressions; Panic of 1907; non-bank commercial failures
JEL
Classification: N11, N21, E44, E32
Implied
Recovery - PDF 249k
(PDF Help)
FDIC Center for Financial Research Working Paper No. 2009-05
Sanjiv R. Das and Paul Hanouna
November 2008
ABSTRACT
In the absence of forward-looking models for recovery rates, market participants
tend to use exogenously assumed constant recovery rates in pricing models. We develop a exible jump-to-default model that uses observables: the stock price and stock
volatility in conjunction with credit spreads to identify implied, endogenous, dynamic
functions of the recovery rate and default probability. The model in this paper is par-
simonious and requires the calibration of only three parameters, enabling the identi_-
cation of the risk-neutral term structures of forward default probabilities and recovery
rates. Empirical application of the model shows that it is consistent with stylized fea-
tures of recovery rates in the literature. The model is exible, i.e., it may be used with
di_erent state variables, alternate recovery functional forms, and calibrated to multi-
ple debt tranches of the same issuer. The model is robust, i.e., evidences parameter
stability over time, is stable to changes in inputs, and provides similar recovery term
structures for di_erent functional speci_cations. Given that the model is easy to un-
derstand and calibrate, it may be used to further the development of credit derivatives
indexed to recovery rates, such as recovery swaps and digital default swaps, as well as
provide recovery rate inputs for the implementation of Basel II.
Keywords: Implied, Recovery, Loss-Given-Default, Credit Default Swaps
JEL
Classification: G0, G1.
Do
Financial Counseling Mandates Improve Mortgage Choice and Performance?
Evidence from a Natural Experiment - PDF 3,335 KB
(PDF Help)
FDIC
Center for Financial Research Working Paper No. 2009-04
Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, and Douglas D. Evanoff
ABSTRACT
We explore the effects of mandatory third-party review of mortgage contracts on the terms, availability,
and performance of mortgage credit. Our study is based on a natural experiment in which the State of
Illinois required ‘high-risk’ mortgage applicants acquiring or refinancing properties in 10 specific zip
codes to submit loan offers from state-licensed lenders to review by HUD-certified financial counselors.
We document that the legislation led to declines in both the supply of and demand for credit, with statelicensed
lenders and lower-quality borrowers disproportionately exiting the affected area. Controlling for
the salient characteristics of the remaining borrowers and lenders, we find that the legislation succeeded
in reducing ex post default rates among counseled borrowers by close to 4 percentage points (about 35%
decline). We attribute this result to actions of lenders responding to the presence of external review and,
to a lesser extent, to counseled borrowers renegotiating their loan terms. We also find that the legislation
nudged some borrowers to choose less risky loan products in order to eschew counseling.
Keywords:
Financial literacy, Lax screening, Subprime crisis, Household finance
JEL
Classification: D14, D18, L85, R21
Pay for Performance?CEO Compensation and Acquirer Returns in BHCs - PDF 905k
(PDF Help)
FDIC
Center for Financial Research Working Paper No. 2009-03
Kristina Minnick, Haluk Unal, Liu Yang
December 2008
ABSTRACT
We examine the impact of managerial incentives on acquisitions in the banking industry. We find that banks whose CEOs have higher pay-for-performance sensitivity (PPS) are less likely to engage in value- reducing acquisitions. Conditional on engaging in acquisitions, those higher-PPS banks have significantly better announcement returns: on average these banks outperform the acquires in the lower-PPS group by 1.2% in a three-day window around the announcement. The positive market reaction can be rationalized by long-term performance. Following acquisitions, banks with high PPS experience greater improvement in their operating performance as measured by ROA.
Keywords:
Keywords: Pay-for-Performance Sensitivity, CEO Compensation, Acquirer Returns, Bank Mergers
JEL classification: G34, G21
Evidence of Improved
Monitoring and Insolvency Resolution after FDICIA - PDF 1673k (PDF
Help)
FDIC
Center for Financial Research Working Paper No. 2009- 02
Edward J. Kane, Rosalind L. Bennett, Robert C. Oshinsky
December 8, 2008
Abstract
To realign supervisory and market incentives, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) adjusts two principal features of federal banking
supervision. First, it requires regulators to examine insured institutions more frequently and
makes them accountable for exercising their supervisory powers. Second, the Act empowers
regulators to wind up the affairs of troubled institutions before their accounting net worth is
exhausted.
Using 1984–2003 data on the outcome of individual bank examinations, this paper
documents that the frequency of rating transitions and the character of insolvency resolutions
have changed substantially under FDICIA. The average interval between bank examinations has
dropped for low-rated banks in the post-FDICIA era. Examiner upgrades have become
significantly more likely in the post-FDICIA era even after controlling for the state of the
economy. However, in recessions managers are slower to correct problems that examiners
identify. As a result, during downturns upgrades become less likely and absorptions become
more likely.
Giving the FDIC authority to wind up troubled banks before their tangible net worth is
exhausted has reduced the role of government in the insolvency-resolution process. Consistent
with an hypothesis that FDICIA has improved incentives, our data show that a markedly larger
percentage of troubled banks now search for a merger partner rather than trying to stay in
business until the regulators force them to fail. This greater reliance on quasi-voluntary mergers
is observable both within and across various stages of the business cycle. These findings suggest
that supervisory interventions became more effective at banks during the post-FDICIA era.
JEL Classifications: G20, G28, G21
Keywords: FDICIA, bank supervision, bank monitoring
The
$700 Billion Bailout: A Public-Choice Interpretation 691K (Word
Help)
FDIC
Center for Financial Research Working Paper No. 2009-01
Carlos D. Ramírez
January 2009
Abstract
On September 29, 2008, the House of Representatives voted to reject HR 3997
(known as the original $700 Billion Bailout Bill). On October 3, the
House reversed course and voted to approve the Emergency Economic Stabilization
Act of 2008 (EESA). This paper applies a political voting model to these
two House votes—the rejection of the bill on September 29 and its passage
on October 3. Both economic conditions and PAC contributions matter in
explaining the two votes, but their effect is attenuated by legislator’s
power. PAC contributions from the American Bankers Association appear
to matter for explaining the legislators who switched. The role of ideology
in explaining either the September 29 or October 3 vote is limited.
Keywords:
JEL
Classification:
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