Contingent liquidity

After the crisis, bank regulators are considering mitigating liquidity risk by introducing quantity limits on liquidity and maturity mismatch. We argue that aggregate liquidity risk can be reduced with little deadweight loss by encouraging banks, through adequate regulatory relief, to satisfy part of their financing needs with a new class of securities. These would include a Roll-Over Option Facility (ROOF) that allows the issuer, for a price, to keep the funds if at maturity a readily observable variable correlated with systemic liquidity risk (e.g. the LIBOR-OIS spread) is above a trigger threshold. At roll-over the yield would reflect the current price of liquidity and credit risk, making ROOFs attractive to investors. The instrument could attenuate a liquidity crisis by reducing banks’ need to roll debt over or sell off assets, and diminish the probability of runs, if markets are convinced that banks can secure sufficient liquidity when needed thanks to the widespread use of this contingent claim.funding, liquidity, contingent claim, financial crisis

Consolidation and efficiency in the financial sector: a review of the international evidence

In response to fundamental changes in regulation and technology, the financial industry around the world is undergoing an unprecedented wave of consolidation. A growing body of empirical literature has attempted to measure the efficiency gains from M&As; however there is little sense of how the results might depend on the country, industry and time period analysed. In this paper we review critically works that cover the main sectors of the financial industry (commercial and investment banks, insurance and asset management companies) in the major industrialized countries over the last twenty years, searching for common patterns that transcend national and sectoral peculiarities. We find that consolidation in the financial sector is beneficial up to a relatively small size in order to reap economies of scale, but there is little evidence that mergers yield economies of scope or gains in managerial efficiency.mergers, efficiency, bank mergers

Securitization is not that evil after all

A growing number of studies on the US subprime market indicate that, due to asymmetric information, credit risk transfer activities have perverse effects on banksÂ’ lending standards. We investigate a large part of the market for securitized assets (“prime mortgages”) in Italy, a country with a regulatory framework analogous to the one prevalent in Europe. Information on over a million mortgages consists of loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal, including the seniority structure of the ABSs issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow a robust way to test for the effects of asymmetric information from the empirical contract theory literature (Chiappori and Salanié, 2000). Overall, our evidence suggests that banks can effectively counter the negative effects of asymmetric information in the securitization market by selling less opaque loans, using signaling devices (i.e. retaining a share of the equity tranche of the ABSs issued by the SPV) and building up a reputation for not undermining their own lending standards.securitization, asymmetric information, signaling, reputation

Why Do Banks Merge?

The banking industry is consolidating at an accelerating pace, yet no conclusive results have emerged on the benefits of mergers and acquisitions. We analyze the Italian market, which is similar to other main European countries. By considering both acquisitions (i.e. the purchase of the majority of voting shares) and mergers we evidence the motives and results of each type of deal. Mergers seek to improve income from services, but the increase is offset by higher staff costs; return on equity improves because of a decrease in capital. Acquisitions aim to restructure the loan portfolio of the acquired bank; improved lending policies result in higher profits.banks, mergers and acquisitions, performance

Financial sector pro-cyclicality: lessons from the crisis

We analyze the main forces affecting financial system pro-cyclicality (the fact that developments in the financial sector can amplify business cycle fluctuations). We first review some major structural developments in financial markets that may influence pro-cyclicality and that have been overlooked in earlier analyses. We then examine three issues that are center stage in the current debate: capital regulation, accounting standards and managers’ incentives. After reviewing the institutional set-up and the key mechanisms at work, we critically examine a series of proposals designed to mitigate pro-cyclicality.pro-cyclicality, financial accelerator, capital requirements, leverage, accounting standards, incentives

Corporate finance in the euro area – including background material

This report analyses the financial position of non-financial enterprises in the euro area, in particular the amount of external financing, the choice between debt and equity and the composition and maturity structure of debt. It aims at identifying the main features of the euro area, as well as the peculiarities that depend on the country of origin and the sector of activity. Attention is also devoted to assessing whether a country’s institutional eatures are correlated with different financial structures by firms. In light of the particular interest in the access of small and medium-sized enterprises (SMEs) to financing, the report also analyses how financing patterns differ across large, medium-sized and small enterprises. Finally, the report discusses the recent trends observed in the corporate finance landscape of the euro area over the past few years. Although it is still too early to pass final judgement, vast structural changes are underway that could have already influenced in a positive way in the availability of external funds for firms. All in all, a comprehensive understanding of corporate finance in the euro area is important from a monetary policy perspective, given its impact on the transmission mechanism and for productivity and economic growth. Moreover, such an understanding is also relevant from a financial stability perspective. A first assessment is now possible eight years into the third stage of Economic and Monetary Union (EMU), given that sufficient data have been accumulated during this period. This assessment is particularly important as the introduction of the single currency has had significant structural effects on the working of financial markets, increasing their size and liquidity, and fostering cross-border competition. The data available for this report generally cover the period 1995-2005, and the cut-off date for the statistics included is 10 March 2007.