Center for Financial Research
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+Modeling Loss Given Default- PDF
FDIC Center for Financial Research Working Paper No. 2018-03
Phillip Li, Xiaofei Zhang, and Xinlei Zhao
This Version: July 2018
We investigate the puzzle in the literature that various parametric loss given default (LGD) statistical models perform similarly by comparing their performance in a simulation framework. We find that, even using the full set of explanatory variables from the assumed data generating process, these models still show similar poor performance in terms of predictive accuracy and rank ordering when mean predictions and squared error loss functions are used. Therefore, the findings in the literature that predictive accuracy and rank ordering cluster in a very narrow range across different parametric models are robust. We argue, however, that predicted distributions as well as the models? ability to accurately capture marginal effects are also important performance metrics for capital models and stress testing. We find that the sophisticated parametric models that are specifically designed to address the bi-modal distributions of LGD outperform the less sophisticated models by a large margin in terms of predicted distributions. Also, we find that stress testing poses a challenge to all LGD models because of limited data and relevant explanatory variable availability, and that model selection criteria based on goodness of fit may not serve the stress testing purpose well. Finally, the evidence here suggests that we do not need to use the most sophisticated parametric methods to model LGD.
JEL Codes: G21, G28
Keywords: loss given default, bi-modal distribution, simulation, predicted distribution, stress testing.
+Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance- PDF
FDIC Center for Financial Research Working Paper No. 2018-02
Christopher Martin, Manju Puri and Alexander Ufier
This Version: May 2018
Using unique, daily, account-level balances data we investigate deposit stability and the drivers of deposit outflows and inflows in a distressed bank. We observe an outflow (run-off) of uninsured depositors from the bank following bad regulatory news. We find that government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures, reduce the outflow of deposits. We also characterize which accounts are more stable (e.g., checking accounts and older accounts). We further provide important new evidence that, simultaneous with the run-off, gross funding inflows (run-in) are large and of first-order impact - a result which is missed when looking at aggregated deposit data alone. Losses of uninsured deposits were largely offset with new insured deposits as the bank approached failure. We show our results hold more generally using a large sample of banks that faced regulatory action. Our results raise questions about depositor discipline, widely considered to be one of the key pillars of financial stability, raising the importance of other mechanisms of restricting bank risk taking, including prudent supervision.
JEL Codes: G21, G28, D12, G01
Keywords: deposit insurance, deposit inflows, funding stability, depositor discipline
+The Dark-Side of Banks? Nonbank Business: Internal Dividends in Bank Holding Companies- PDF
FDIC Center for Financial Research Working Paper No. 2018-01
Jonathan Pogach and Haluk Unal
This Version: January 2018
Our study highlights the liquidity and capital pressures created by non-banking activities on banks residing within the same bank holding company (BHC). We use a sample of BHCs with large non-bank subsidiaries between 2002 and 2007 to show that banks bear the pressures of dividend smoothing. Banks in BHCs increase internal dividends to parents regardless of their own income. In contrast, non-banks in BHCs appear to be shielded from the pressures of inflexible external dividend policies. We also show that when faced with declining incomes, the banks fund their internal dividends through increased borrowing. Using a differences-in-differences, we show that banks in BHCs increase their payout ratios by 7 percentage points following major non-bank acquisitions during an expanded sample period of 1993-2007. Our evidence on the extraction of cash from banks to fund non-bank activities and capital market pressures to smooth dividends sheds new light on the debate on the optimal scope of BHCs. These observations support the arguments of a dark-side to internal capital markets in which the federally insured banks become a source of strength to the BHC and its non-bank segment.
JEL Codes: D22, G21, G31, G35, G38, L25
Keywords: dividends, payout policy, internal capital markets, bank holding company, risk shifting, bank scope-economies