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| Working Papers – 2012 |
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Inside Debt, Bank Default Risk and Performance During the Crisis FDIC Center for Financial Research Working Paper No. 2012-03 First Version: May 2012 Published as: Bennett, Rosalind L., Levent Guntay, and Haluk Unal. "Inside Debt, Bank Default Risk and Performance During the Crisis." Journal of Financial Intermediation 24, no. 4 (2015): 487-513. Abstract In this paper, we examine whether the structure of the chief executive officer's (CEO) compensation package can explain default risk and performance in bank holding companies (BHCs) during the recent credit crisis. Using a sample of 371 BHCs, we show that in 2006 lower holdings of inside debt relative to equity by a CEO has an association with higher default risk and worse performance during the crisis period. We also show that inside debt is a better signal of the BHCs' performance and default risk than inside equity measures. Finally, we provide evidence that supervisors issued favorable ratings to the lead bank in BHCs that paid their CEOs relatively higher inside debt. JEL Codes: G01, G21, G28, G32 |
On the Real Effects of Bank Bailouts: Micro-Evidence from Japan FDIC Center for Financial Research Working Paper No. 2012-02 This Version: September 2011 Published as: Giannetti, Mariassunta and Andrei Simonov. "On the Real Effects of Bank Bailouts: Micro-Evidence from Japan." American Economic Journal: Macroeconomics 5, no. 1 (2013): 135-167. Abstract Exploiting the Japanese banking crisis of the 1990s as a laboratory, we investigate the effects of bank bailouts on the supply of credit and on the valuations and the real performance of banks' clients. Consistent with recent theories, our findings indicate that the size of the capital injections relative to the banks' initial financial conditions is crucial for the success of bank bailouts. Capital injections that are sufficiently large to reestablish bank capital requirements increase the supply of credit and spur investment. In contrast, not only do capital injections that are too small fail to increase the supply of credit, but they also encourage the evergreening of non-performing loans and favor investment by unviable "zombie" firms. JEL Codes: G21; G34 |
The Supply-Side Determinants of Loan Contract Strictness FDIC Center for Financial Research Working Paper No. 2012-01 This Version: November 7, 2011 Published as: Murfin, Justin. "The Supply-Side Determinants of Loan Contract Strictness." The Journal of Finance 67, no. 5 (2012): 1565-1601. Abstract Using a novel measure of contract strictness based on the ex-ante probability of a covenant violation, I investigate how lender-specific shocks impact the strictness of the loan contract that a borrower receives. Exploiting between-bank variation in recent portfolio performance, I find evidence that banks write tighter contracts than their peers after suffering payment defaults to their own loan portfolios, even when defaulting borrowers are in different industries and geographic regions than the current borrower. The effects of recent defaults persist after controlling for bank capitalization, although compression in bank equity is also strongly associated with tighter contracts. The evidence is most consistent with lenders using their default experience to make inference about their screening ability and adjusting contracts accordingly. Finally, contract tightening is most pronounced for borrowers who are dependent on a relatively small circle of lenders, with a one standard deviation increase in lender defaults implying covenant tightening nearly equivalent to that of a two-notch downgrade in the borrower's own credit rating. JEL Codes: G21 |
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.