Recent developments in Remote Document Supply (RDS) in the UK – 3

A review of recent developments in remote document supply and related matters in the UK. With the decline in remote document supply the future participation of a key institution is called into question. While there are few other realistic options, the two leading alternatives are engaged in a battle for the same market. Furthermore, the future of a key standard underpinning transactions is also uncertain

Alternative methods of corporate control in commercial banks

Banking structure

The economics of private placements : middle-market corporate finance, life insurance companies, and a credit crunch

In this article, Stephen Prowse examines the private placement market. Like the bank loan market, this market is information-intensive: parties negotiate lending terms, lenders evaluate and monitor borrowers' credit risk, covenants are used to control risk, and borrowers lack access to public debt markets. There are also differences from the bank loan market : debt instruments are securities, not loans; maturities are longer; interest rates are fixed, not floating; and the principal investors are life insurance companies not banks. The article provides evidence on the credit crunch that occurred in the below-investment-grade sector of this market in the early 1990s and that apparently continues to this day. Asset-quality problems in 1990 and 1991 focused regulatory, stock market, media, and policyholder attention on the financial solvency of insurers, who withdrew from this sector of the market. The article also examines reasons for the persistence of the crunch.Bank loans ; Interest rates ; Credit

The economics of the private equity market

The private equity market is an important source of funds for start-ups, private middle-market companies, firms in financial distress, and public firms seeking buyout financing. Over the past fifteen years, it has been the fastest growing corporate finance market, far surpassing the public equity and public and private bond markets. In this article, Stephen Prowse examines the economic foundations of the private equity market and describes its institutional structure. He also explores reasons for the market's explosive growth and highlights the main characteristics of that growth, including data on returns to private equity investors. He describes the important investors, intermediaries, and issuers in the market and their interactions with each other. In particular, he investigates how the major intermediary in the market--the limited partnership--addresses the severe information problems associated with investing in small private firms.Capital market ; Financial markets ; Venture capital

Alternative methods of corporate control in commercial banks

In this article, Stephen Prowse investigates how owners of commercial banks encourage management to follow value-maximizing policies. While the "corporate control mechanism" in nonfinancial firms is well documented, for the banking industry much less evidence is available. Moreover, unique factors in the operating environment of commercial banks may mean that their corporate control mechanism operates differently from that of nonfinancial firms. ; Prowse analyzes a sample of bank holding companies (BHCs) from 1987 to 1992 to determine how many underwent a change in corporate control by hostile takeover, friendly merger, action by the board of directors, or intervention by regulators. Prowse finds that the primary market-based corporate control mechanism among BHCs is action by the board, although bank boards appear to be much less assertive than boards of nonfinancial firms. Overall, the market-based corporate control mechanisms in banks do not appear as efficient at disciplining managers as they are in other firms. By default, this has given a primary role to regulators to provide a "last resort" control mechanism. Prowse analyzes reasons for this and evaluates how proposed banking legislation might affect corporate governance.Banks and banking ; Corporations

Corporate finance in international perspective: legal and regulatory influences on financial system development

In the postwar period, systems of corporate finance and governance have emerged in the United States, Japan, and Germany that are dramatically different from one another. To date, there has been little focus on why. Stephen Prowse argues that differences in three aspects of the legal and regulatory environments in these countries are responsible. First, the severity of legal and regulatory restraints on financial institutions being "active" investors in firms. Second, the degree to which corporate securities markets are suppressed by regulation. Finally, the degree to which securities markets are "passively" suppressed by the absence of mandated disclosure requirements. ; Prowse compares the merits of each system and argues that the U.S. system may be more favorable to the growth of high-technology firms. He discusses the future evolution of each system. The German and Japanese regulatory environments are changing rapidly to increase the role of securities markets in corporate finance. The U.S. environment is also changing to give financial institutions more latitude to be active investors in firms. Over the long term, the regulatory environments of all three countries appear to be converging. The focal point of this convergence is an entirely new environment in which financial institutions are free to be active investors and corporate securities markets are unhindered by regulatory obstacles.Corporations - Finance ; International finance

Corporate control in Central Europe and Russia : should banks own shares?

The authors review corporate governance arrangements in the West and conclude that for a system based on bank ownership and control of firms to succeed, the banking system must be free of perverse incentives and state interference, as well as subject to adequate supervision by banking authorities and competition from market forces. Admirable progress over the past few years notwithstanding, these conditions do not now exist in the countries of Central Europe and Russia, so a corporate governance system based on bank ownership is not appropriate. That is not to say that such a system would not eventually be appropriate - but not before much more effort is made to create a competitive, private, well-supervised banking system (which is needed in any case). Changes in the banking system that are prerequisites for any large-scale bank involvement in the ownership and governance of firms are simple to enunciate but less easy to implement: (1) Sever existing relationships between the state and banks. Privatization is the strongest guarantee that bank investment decisions will not be subject to state influence, but bank privatization has been slow in most countries. This reflects limited understanding of the financial sector's poor condition, the many institutional and political obstacles to bank reform, and the initial decision in many countries to focus first on the"real economy"(a decision that in hindsight seems unfortunate). (2) Dispel the belief (which still exists in some countries) that poor lending and investments will enventually be underwritten by the government, with few consequences for managers. (3) Greatly strengthen competition in the banking system, in part by encouraging new private banks and the entry of foreign banks. (Some countries, such as Poland, have taken the opposite tack, refusing to issue new licenses.) (4) Provide effective bank supervision and an effective prudential and regulatory framework. This requires investing substantially in setting up institutions, accounting systems, and information networks, in hiring and training qualified personnel, and in ensuring that the system is immune from political intervention. Developing such a system will surely be long and drawn out, and may require foreign assistance.Banks&Banking Reform,Payment Systems&Infrastructure,Financial Intermediation,Financial Crisis Management&Restructuring,International Terrorism&Counterterrorism,Financial Intermediation,Financial Crisis Management&Restructuring,Municipal Financial Management,Small Scale Enterprise,Banks&Banking Reform

What's good for GM...? Using auto industry stock returns to forecast business cycles and test the Q-theory of investment

Business cycles ; General Motors Corporation ; Investments

Recent developments in Remote Document Supply (RDS) in the UK – 3

A review of recent developments in remote document supply and related matters in the UK. With the decline in remote document supply the future participation of a key institution is called into question. While there are few other realistic options, the two leading alternatives are engaged in a battle for the same market. Furthermore, the future of a key standard underpinning transactions is also uncertain