The Bank's Choice of Financing and the Correlation Structure of Loan Returns

This paper examines how the correlation structure of loan returns within a bank s loan portfolio a.ects its choice of .nancing when the bank faces binding capital constraints and there is asymmetric information about the quality of its loans.The paper uses an asymmetric information model similar to Myers and Majluf (1984), where a bank must raise its equity-toassets ratio either by issuing equity or by selling loans in the secondary market.The results suggest that the correlation structure of loan returns can have signi.cant in.uence on the cost of issuing equity since it a.ects the variance of a banks loan portfolio. However, it is shown that a bank will always prefer to sell loans instead of equity if it has favorable inside information for some of its loans and unfavorable information for some of its other loans.banks;financing;correlation;loans;capital;information

The Impact of Explicit Deposit Insurance on Market Discipline

This paper studies the impact of explicit deposit insurance on market discipline in a framework that resembles a natural experiment.We improve upon previous studies by exploiting a unique combination of country-specific circumstances, design features, and data availability that allows us to distinguish between demand and supply effects.We show that deposit insurance causes a significant reduction in market discipline.We also show that the effect of deposit insurance depends on the coverage rate.When the coverage rate is more than 60 percent, market discipline is significantly reduced and it is completely eliminated when the coverage rate reaches 100 percent.Our results also suggest that most market discipline comes from large depositors and that the introduction of deposit insurance affected mainly those who were already active in imposing discipline.Our findings emphasize the need for binding coverage limits per depositor, high degrees of co-insurance, and "tailor made" deposit insurance systems that preserve the incentives of a critical mass of depositors that are willing and able to perform this function.market discipline;deposit insurance;deposit insurance coverage

Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment

We analyse the impact of monetary policy on bank risk-taking and pricing. Bolivia provides us with an excellent experimental setting to identify this impact. Its small economy is not synchronized with the US economy but its banking system is almost fully dollarized. Consequently the US federal funds rate is the appropriate measure of monetary policy. We study the impact of the federal funds rate on the riskiness and pricing of new bank loans granted in Bolivia between 1999 and 2003, a period of significant variation in the federal funds rate. We find robust evidence that a decrease in the US federal funds rate prior to loan origination raises the monthly probability of default on individual bank loans. We also find that initiating loans with a subprime credit rating or loans to riskier borrowers with current or past non-performance become more likely when the federal funds rate is low. However, loan spreads do not increase, seemingly even decrease, in changes in the probability of default. Hence banks do not seem to price the additional risk taken. Furthermore, banks with more liquid assets and less funds from foreign financial institutions take more risk when the federal funds rate is low, and reduce loan spreads more despite the additional risk they seemingly take.monetary policy;federal funds rate;lending standards;credit risk;subprime borrowers;duration analysis

Tests of Ex Ante Versus Ex Post Theories of Collateral Using Private and Public Information

Collateral is a widely used, but not well understood, debt contracting feature. Two broad strands of theoretical literature explain collateral as arising from the existence of either ex ante private information or ex post incentive problems between borrowers and lenders. However, the extant empirical literature has been unable to isolate each of these effects. This paper attempts to do so using a credit registry that is unique in that it allows the researcher to have access to some private information about borrower risk that is unobserved by the lender. The data also includes public information about borrower risk, loan contract terms, and ex post performance for both secured and unsecured loans. The results suggest that the ex post theories of collateral are empirically dominant, although the ex ante theories are also valid for customers with short borrower-lender relationships that are relatively unknown to the lender.Collateral;Asymmetric Information;Banks

Does Monetary Policy Affect the Central Bank's Role in Bank Supervision?

central banking;bank supervision;monetary policy

On the Non-Exclusivity of Loan Contracts: An Empirical Investigation

Credit contracts are non-exclusive. A string of theoretical papers shows that nonexclusivity generates important negative contractual externalities. Employing a unique dataset, we identify how the contractual externality stemming from the non-exclusivity of credit contracts affects credit supply. In particular, using internal information on a creditor’s willingness to lend, we find that a creditor reduces its loan supply when a borrower initiates a loan at another creditor. Consistent with the theoretical literature on contractual externalities, the effect is more pronounced the larger the loans from the other creditor. We also find that the initial creditor’s willingness to lend does not change if its existing and future loans retain seniority over the other creditors’ loans and are secured with assets whose value is high and stable over time.non-exclusivity;contractual externalities;credit supply;debt seniority

Empathy and emotional intelligence: What is it really about?

Empathy is the "capacity" to share and understand another’s "state of mind" or emotion. Itis often characterized as the ability to “put oneself into another’s shoes”, or in some way experience the outlookor emotions of another being within oneself. Empathy is a powerful communication skill that is often misunderstoodand underused. Initially, empathy was referred to as “bedside manner”; now, however, authors and educatorsconsider empathetic communication a teachable, learnable skill that has tangible benefits for both clinicianand patient: Effective empathetic communication enhances the therapeutic effectiveness of the clinician-patientrelationship. Appropriate use of empathy as a communication tool facilitates the clinical interview, increases theefficiency of gathering information, and honours the patient. Additionally, Emotional Intelligence (EI), often measuredas an Emotional Intelligence Quotient (EQ), describes a concept that involves the ability, capacity, skill or aself-perceived ability, to identify, assess, and manage the emotions of one’s self, of others, and of groups. Becauseit is a relatively new area of psychological research, the concept is constantly changing. The EQ concept argues thatIQ, or conventional intelligence, is too narrow; that there are wider areas of emotional intelligence that dictate andenable how successful we are. Success requires more than IQ (Intelligence Quotient), which has tended to be thetraditional measure of intelligence, ignoring essential behavioural and character elements. We’ve all met peoplewho are academically brilliant and yet are socially and inter-personally inept. And we know that despite possessinga high IQ rating, success does not automatically follow. The aim of this review is to describe the concept of empathyand emotional intelligence, compare it to other similar concepts and clarify their importance as vital parts of effectivesocial functioning. Just how vital they are, is a subject of constant debate

The Bank's Choice of Financing and the Correlation Structure of Loan Returns

This paper examines how the correlation structure of loan returns within a bank s loan portfolio a.ects its choice of .nancing when the bank faces binding capital constraints and there is asymmetric information about the quality of its loans.The paper uses an asymmetric information model similar to Myers and Majluf (1984), where a bank must raise its equity-toassets ratio either by issuing equity or by selling loans in the secondary market.The results suggest that the correlation structure of loan returns can have signi.cant in.uence on the cost of issuing equity since it a.ects the variance of a banks loan portfolio. However, it is shown that a bank will always prefer to sell loans instead of equity if it has favorable inside information for some of its loans and unfavorable information for some of its other loans.