The Place of Risk Management in Financial Institutions

The purpose of this paper is to address two issues. It defines the appropriate role played by institutions in the financial sector and focuses on the role of risk management in firms that use their own balance sheets to provide financial products. A key objective is to explain when risks are better transferred to the purchaser of the assets issued or created by the financial institution and when the risks of these financial products are best absorbed by the firm itself. However, once these risks are absorbed, they must be efficiently managed. So, a second part of the current analysis develops a framework for efficient and effective risk management for those risks which the firm chooses to manage within its balance sheet. The goal of this activity is to achieve the highest value added from the risk management undertaken.

The Competitive Performance of Life Insurance Firms in the Retirement Asset Market

This paper summarizes the findings of the joint Wharton Financial Institutions Center and KPMG study of the retirement assets market and the role of life insurance companies within it. The study began with the following goals: Investigate how people save for retirement and whether this is adequate. Determine the primary products and institutions of the retirement asset market and observe how these have changed through time. Key findings: For most, asset accumulation is less than adequate for a comfortable retirement. The average worker exhibits little of the needed financial understanding to adequately plan for retirement. Upon retirement, households do not spend down their assets optimally. The retirement asset market is rapidly expanding. Products in retirement portfolios have shifted with time. The market share of mutual funds has exploded, mostly at the expense of depository institutions. Life insurance companies maintain a large, but slipping share.

Prediction of photoperiodic regulators from quantitative gene circuit models

Photoperiod sensors allow physiological adaptation to the changing seasons. The external coincidence hypothesis postulates that a light-responsive regulator is modulated by a circadian rhythm. Sufficient data are available to test this quantitatively in plants, though not yet in animals. In Arabidopsis, the clock-regulated genes CONSTANS (CO) and FLAVIN, KELCH, F-BOX (FKF1) and their lightsensitive proteins are thought to form an external coincidence sensor. We use 40 timeseries of molecular data to model the integration of light and timing information by CO, its target gene FLOWERING LOCUS T (FT), and the circadian clock. Among other predictions, the models show that FKF1 activates FT. We demonstrate experimentally that this effect is independent of the known activation of CO by FKF1, thus we locate a major, novel controller of photoperiodism. External coincidence is part of a complex photoperiod sensor: modelling makes this complexity explicit and may thus contribute to crop improvement

The effect of corporate governance on the performance of US investment banks

This paper focuses on the impact of the corporate governance, using a plethora of measures, on the performance of the US investment banks over the 2000-2012 period. This time period offers a unique set of information, related to the credit crunch, that we model using a dynamic panel threshold analysis to reveal new insights into the relationship between corporate governance and bank performance. Results show that the board size asserts a negative effect on performance consistent with the ‘agency cost’ hypothesis, particularly for banks with board size higher than ten members. Threshold analysis reveals that in the post-crisis period most of investment banks opt for boards with less than ten members, aiming to decrease agency conflicts that large boards suffer from. We also find a negative association between the operational complexity and performance. Moreover, the CEO power asserts a positive effect on performance consistent with the ‘stewardship’ hypothesis. In addition, an increase in the bank ownership held by the board has a negative impact on performance for banks below a certain threshold. On the other hand, for banks with board ownership above the threshold value this effect turns positive, indicating an alignment between shareholders’ and managers’ incentives

Banks’ liquidity buffers and the role of liquidity regulation

We assess the determinants of banks’ liquidity holdings using data for nearly 7000 banks from 25 OECD countries. We highlight the role of several bank-specific, institutional and policy variables in shaping banks’ liquidity risk management. Our main question is whether liquidity regulation neutralizes banks’ incentives to hold liquid assets. Without liquidity regulation, the determinants of banks’ liquidity buffers are a combination of bank-specific and country-specific variables. While most incentives are neutralized by liquidity regulation, a bank’s disclosure requirements remain important. The complementarity of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation

Risk-Return Efficiency, Financial Distress Risk, and Bank Financial Strength Ratings

This paper investigates whether there is any consistency between banks' financial strength ratings (bank rating) and their risk-return profiles. It is expected that banks with high ratings tend to earn high expected returns for the risks they assume and thereby have a low probability of experiencing financial distress. Bank ratings, a measure of a bank's intrinsic safety and soundness, should therefore be able to capture the bank's ability to manage financial distress while achieving risk-return efficiency. We first estimate the expected returns, risks, and financial distress risk proxy (the inverse z-score), then apply the stochastic frontier analysis (SFA) to obtain the risk-return efficiency score for each bank, and finally conduct ordered logit regressions of bank ratings on estimated risks, risk-return efficiency, and the inverse z-score by controlling for other variables related to each bank's operating environment. We find that banks with a higher efficiency score on average tend to obtain favorable ratings. It appears that rating agencies generally encourage banks to trade expected returns for reduced risks, suggesting that these ratings are generally consistent with banks' risk-return profiles