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| Working Papers – 2011 |
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Local Economic Effects of a Government-Owned Depository Institution: Evidence from a Natural Experiment in Japan FDIC Center for Financial Research Working Paper No. 2011-08 This Version: July 2011 Published as: Imai, Masami. "Local Economic Effects of a Government-Owned Depository Institution: Evidence from a Natural Experiment in Japan." Journal of Financial Intermediation 21, no. 1 (2012): 1-22. Abstract Beginning in 2000, Japan's postal saving system experienced a rapid outflow of funds as a large number of 10-Year Postal Saving Certificates were maturing. This paper exploits this episode as a natural experiment in order to investigate the effects of a government-owned depository institution on local economic performance. The results show that the prefectures in which local funds were more heavily invested in the postal saving system in the early 1990s tended to experience a larger shift of funds away from the postal saving system and that these prefectures performed better in terms of output and small business creation in the early 2000s. |
LA Century of Firm – Bank Relationships: Why the Transition to Multiple Banking? FDIC Center for Financial Research Working Paper No. 2011-07 This Version: March 2011 Abstract We study how relationships between firms and banks evolved between during the Twentieth century in Britain. We document and explain a remarkable transition from single to multiple firm-bank relationships during the last twenty years of the sample period. Larger, global, or transparent companies with greater needs for bank credit and specialized services are more likely to add a bank. Deregulation and intensifying competition in the banking sector during the 1970s spurred banks to supply credit and services through these multilateral arrangements. Firm size, geographical presence, leverage, and control determine whether a clearer bank, another British bank or a foreign bank is added. |
LA Century of Firm – Bank Relationships: The Marginal Value of Cash, Cash Flow Sensitivities, and Bank-Finance Shocks in Nonlisted Firms FDIC Center for Financial Research Working Paper No. 2011-06 This Version: February 7, 2011 Abstract We study how nonlisted firms trade off financial, real, and distributive uses of cash. We show that firms' marginal value of cash (MVC) affects the mix of external and internal finance used to absorb fluctuations in cash flows; in particular, high-MVC firms employ substantially more external finance on the margin. Linking firms to their main bank, we find that shocks to bank finance affect firms' trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flow. Our analysis suggests that shocks to external financing costs are transmitted to the real economy via firms' marginal value of cash. |
Global Retail Lending in the Aftermath of the US Financial Crisis: Distinguishing between Supply and Demand Effects FDIC Center for Financial Research Working Paper No. 2011-05 This Version: June 18, 2010 Published as: Puri, Manju, Jorg Rocholl, and Sascha Steffen. "Global Retail Lending in the Aftermath of the US Financial Crisis: Distinguishing between Supply and Demand Effects." Journal of Financial Economics 100, no. 3 (2011): 556-578. Abstract This paper examines the broader effects of the U.S. financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany using a unique dataset of German savings banks during the period 2006 through 2008 for which we have the universe of loan applications and loans granted. Our experimental setting allows us to distinguish between savings banks affected by the U.S. financial crisis through their holdings in Landesbanken with substantial subprime exposure and unaffected savings banks. The data enable us to distinguish between demand and supply side effects of bank lending and find that the U.S. financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down, it is not substantially different for the affected and non-affected banks. More importantly, we find evidence of a significant supply side effect in that the affected banks reject substantially more loan applications than non-affected banks. This result is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared to consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects. |
Are Foreclosures Contagious? FDIC Center for Financial Research Working Paper No. 2011-04 This Version: January 19, 2011 Abstract Using a large sample of U.S. mortgages observed over the 2005-2009 period, we find that foreclosures are contagious. After controlling for major factors known to influence a borrower's decision to default, including borrower and loan characteristics, local demographic and economic conditions, and changes in property values, the likelihood of a mortgage default increases by as much as 24% with a one standard deviation increase in the foreclosure rate of the borrower's surrounding zip code. We find that foreclosure contagion is most prevalent among strategic defaulters: borrowers who are underwater on their mortgage but are not likely to be financially distressed. Taken together, the evidence supports the notion that foreclosures are contagious. |
Systemic Risk Components and Deposit Insurance Premia FDIC Center for Financial Research Working Paper No. 2011-03 This Version: December 10, 2010 Published as: Staum, Jeremy. "Systemic Risk Components and Deposit Insurance Premia." Quantitative Finance 12, no. 4 (2012): 651-662. Abstract In light of recent events, there have been proposals to establish a theory of financial system risk management analogous to portfolio risk management. One important aspect of portfolio risk management is risk attribution, the process of decomposing a risk measure into components that are attributed to individual assets or activities. The theory of portfolio risk attribution has limited applicability to systemic risk because systems can have richer structure than portfolios. We take a first step towards a theory of systemic risk attribution and illuminate the design process for systemic risk attribution by developing some schemes for attributing systemic risk in an application to deposit insurance. |
Anomalies and Financial Distress FDIC Center for Financial Research Working Paper No. 2011-02 This Version: April 21, 2010 Published as: Avramov, Doron, Tarun Chordia, Gergana Jostova, and Alexander Philipov. "Anomalies and Financial Distress." Journal of Financial Economics 108, no. 1 (2013): 139-159. Abstract This paper explores commonalities across asset-pricing anomalies. In particular, we assess implications of financial distress for the profitability of anomaly-based trading strategies. Strategies based on price momentum, earnings momentum, credit risk, dispersion, idiosyncratic volatility, and capital investments derive their profitability from taking short positions in high credit risk firms that experience deteriorating credit conditions. Such distressed firms are highly illiquid and hard to short sell, which could establish nontrivial hurdles for exploiting anomalies in real time. The value effect emerges from taking long positions in high credit risk firms that survive financial distress and subsequently realize high returns. The accruals anomaly is an exception - it is robust amongst high and low credit risk firms as well as during periods of deteriorating, stable, and improving credit conditions. |
The Use of Credit Default Swaps by U.S. Fixed-Income Mutual Funds FDIC Center for Financial Research Working Paper No. 2011-01 This Version: November 19, 2010 Abstract We examine the use of credit default swaps (CDS) in the U.S. mutual fund industry. We find that among the largest 100 corporate bond funds the use of CDS has increased from 20% in 2004 to 60% in 2008. Among CDS users, the average size of CDS positions (measured by their notional values) increased from 2% to almost 14% of a fund's net asset value. Some funds exceed this level by a wide margin. CDS are predominantly used to increase a fund's exposure to credit risks rather than to hedge credit risk. Consistent with fund tournaments, under performing funds use multi-name CDS to increase their credit risk exposures. Finally, funds that use CDS underperform funds that do not use CDS. Part of this underperformance is caused by poor market timing. JEL Codes: G11, G15, G23 |
The Center for Financial Research (CFR) Working Paper Series allows CFR staff and their coauthors to circulate preliminary research findings to stimulate discussion and critical comment. Views and opinions expressed in CFR Working Papers reflect those of the authors and do not necessarily reflect those of the FDIC or the United States. Comments and suggestions are welcome and should be directed to the authors. References should cite this research as a “FDIC CFR Working Paper” and should note that findings and conclusions in working papers may be preliminary and subject to revision.