Credit Spreads in the Market for Highly Leveraged Transaction Loans

This paper is an empirical exploration of the determinants of the required credit spreads on highly leveraged transaction (HLT) loans. The analysis uses a multi-factor spread model to estimate the movement of loan spreads relative to spreads required in the (competing) corporate bond market as well as the significance of loan-specific characteristics in determining loan spreads. The empirical estimates are based on the Loan Pricing Corporation’s database which consists of over 4000 loan transactions between 1987-1994. We find a positive HLT loan spread sensitivity to changes in spreads in the corporate bond market, but this sensitivity is significantly less than unity; indicating that the HLT loan market and high yield public debt market are not fully integrated. Furthermore, there is evidence that lenders augment, rather than substitute, loan yield spreads with additional fees for syndication, commitment and cancellation risks. In general syndicated loans have lower yield spreads than other HLT loan types

The Impact of Mega-Catastrophes on Insurers: An Exposure-Based Analysis of the U.S. Homeowners’ Insurance Market

Insurance is a key risk-sharing mechanism that protects citizens and governments from the losses caused by natural catastrophes. Given the increase in the frequency and intensity of natural catastrophes over recent years, this article analyzes the performance effects of mega-catastrophes for U.S. insurance firms using a measure of market expectations. Specifically, we analyze the share price losses of insurance firms in response to catastrophe events to ascertain whether mega-catastrophes significantly damage the performance of insurers and whether different types of mega-catastrophes have different impacts. The main message from our analysis is that the impact of mega-catastrophes on insurers has not been too damaging. While the exact impact of catastrophes depends on the nature of the event and the degree of competition within the relevant insurance market (less competition allows insurers to recoup catastrophe losses through adjustments to premiums), our overall results suggest that U.S. insurance firms can adequately manage the risks and costs of mega-catastrophes. From a public policy perspective, our results show that insurance provides a robust means of sharing catastrophe losses to help reduce the financial consequences of a catastrophe event

Determinants of bank profitability in transition countries: What matters most?

The aim of this paper is to investigate the determinants of bank profitability in the early transition countries of Central and Eastern Europe (CEE), and in the late transition countries of the former USSR. We apply a GMM technique for the period covering 2000–2013. The results show that profitability persists and the determinants of bank profitability vary across transition countries. Particularly, the banking sector of early transition countries is more competitive. However, the impact of credit risk on bank profitability is positive in early transition countries, but negative in late transition countries. Government spending and monetary freedom negatively influence bank profitability only in late transition countries. Moreover, better capitalised banks are more profitable in early transition countries implying that these banking sectors are more robust. A range of possible approaches that governments can take to further develop banking sectors are discussed

The behaviour of interest rate spreads prior to and after the financial crisis: evidence across OECD countries.

This study investigates the impact of the 2008 global financial crisis on interest rate spreads across OECD countries, using a number of panel methodological approaches, over the 1990–2015 period. We examine the differential impact of the global financial crisis on interest rate spreads by dividing the sample period into two, i.e. the period prior to and after the crisis. Having identified and estimated the impact of a number of drivers on interest rate spreads, the findings document that after the 2008 financial crisis, the sensitivity of spreads to its determinants turn out to be statistically significant and incorporate credit risk to a greater extent. The findings survive a number of robustness checks. The policy implications of the empirical findings are also discussed.N/

Structure and Development of Financial Institutions and Links with Trust: Cross-Country Evidence

We explore the links between trust and a broad range of financial structure and development measures. Our base sample is a cross section of 48 countries and the analysis covers the period 1980-1994. We use a new World Bank data set that provides the most comprehensive coverage of financial development and structure to this date. We find that trust is correlated with financial depth and efficiency as well as with stock market development. Results hold when using an instrumental variable approach, and they are robust to changes in specification when using a formal Sala-i-Martín sensitivity analysis