Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord

The 1998 passage of the Land Revaluation Law in Japan provided regulatory forbearance to Japanese banks in the form of a regulatory capital infusion. We test whether this divergence from international bank capital requirements had an impact on Japanese bank lending behavior. Because this natural experiment created an exogenous supply shock, we can utilize it to disentangle demand and supply effects in order to determine the impact on Japanese bank lending in both the U.S. and Japan. We find that the infusion of regulatory capital had no aggregate impact on Japanese bank lending in Japan, but it did change the allocation of loans. Well-capitalized Japanese banks shifted their lending from low margin, less capital intensive mortgage lending toward higher yielding, more capital intensive commercial loans. Moreover, we find evidence consistent with a shifting of Japanese bank lending activity away from U.S. lending(which is predominately real estate based) to domestic lending to fund manufacturing. Thus, we find that divergences from international capital standards have significant allocative effects on lending, as well as on bank profitability.Basel; international lending; capital adequacy; allocative effects; aggregate effects

Risk and Market Segmentation in Financial Intermediaries’ Returns

This study examines both the quantity and price of risk exposure for different segments of financial intermediaries in order to determine whether market segmentation exists in the financial services industry in the United States. We distinguish between depository institutions, securities firms, insurance companies, mutual funds, and other financial firms using each company s SIC code. We find evidence of market segmentation in both market risk levels and market risk premiums. The results provide little evidence of interest rate risk exposure across all types of financial intermediaries, suggesting the prevalence of hedging programs using interest rate derivatives. However, the market prices interest rate risk exposure differentially by type of financial intermediary. We find that as a market segment, insurance companies were exposed to more interest rate risk particularly in the period late 1980 s to early 1990 s. The interest rate risk premium for banks was among the highest of all financial intermediaries. Overall, we find that securities firms, as a group, have the most market risk exposure, followed in order of descending market beta, by banks, other financial firms, insurance companies, and mutual funds, although the order is reversed when examining the market risk premium. Indeed, we find support for an inverse relationship between the quantity and price for market risk, but not for interest rate risk. When we investigate the impact of two regulatory policy changes, we find that (1) the shift in the conduct of monetary policy towards targeting of monetary aggregates induced banks to take on more market risk, probably due to a decline in their charter value; (2) bank market risk-taking increased further with the introduction of riskbased capital requirements which further reduce charter value for banks; and (3) insurance companies are subject to the highest interest rate risk premiums during the 1988-1994 subperiod, following by commercial banks, probably due to interest rate risk subsidy under the risk-based capital requirements. Overall, during the period 1974-1994, banks increased their market risk exposure despite the tightening of regulatory restrictions, insurance companies increased their interest rate risk exposure over the subperiods. We create synthetic universal banks comprised of portfolios of banks, securities firms, and insurance companies. We find that the synthetic universal banks have significantly positive excess returns, with lower market and interest rate risk exposures and higher expected returns than securities firms. This paper was presented at the Financial Institutions Center's October 1996 conference on "

Cyclicality in Catastrophic and Operational Risk Measurements

Using equity returns for financial institutions we estimate both catastrophic and operational risk measures over the period 1973-2001. We find evidence of cyclical components in both the catastrophic and operational risk measures obtained from the Generalized Pareto Distribution and the Skewed Generalized Error Distribution. Our new, comprehensive approach to measuring operational risk shows that approximately two thirds of financial institutions’ returns represents compensation for operational risk

Cyclicality in Catastrophic and Operational Risk Measurements

Using equity returns for financial institutions we estimate both catastrophic and operational risk measures over the period 1973-2001. We find evidence of cyclical components in both the catastrophic and operational risk measures obtained from the Generalized Pareto Distribution and the Skewed Generalized Error Distribution. Our new, comprehensive approach to measuring operational risk shows that approximately two thirds of financial institutions’ returns represents compensation for operational risk

A Comparison of Methods for Imposing Curvature on the Normalized Quadratic Indirect Profit Function

Research Methods/ Statistical Methods,

Applications of Differential Inequalities to Persistence and Extinction Problems for Reaction-Diffusion Systems

Systems of nonlinear reaction-diffusion equations representing models of competition, predation, and mutualism are presented and discussed. The models are divided into two categories, patch models and continuous models which can be represented by systems of ordinary differential equations or by systems of partial differential equations, respectively. Within each of these categories there are four types of diffusion mechanisms, random, biased, directed, and predator-prey diffusion. Conditions for system persistence and extinction are sought. For the patch models, existence, uniqueness, positivity, and boundedness of solutions are discussed. Persistence of a nonnegative component ui (t) means limsup/t→∞ ui (t) \u3e 0 versus system persistence of nonnegative components ui (t) which means limsup/t→∞ ui (t) \u3e 0, i = 1,..., n , provided the solutions exist on [0, ∞) . Definitions of weak and strong persistence are also given. It is shown that complete system extinction (solutions tend to zero) can occur in the patch random diffusion model. However this is not possible in any of the other patch models. The persistence criteria for the logistic random diffusion model as well as the predator-prey diffusion model are completely determined. Numerous theorems are presented which give necessary conditions for weak and strong persistence. For the continuous models, uniqueness, positivity, and boundedness of solutions are discussed for initial boundary value problems. Dirichlet or Neumann boundary conditions are prescribed on a bounded domain B. Persistence of a nonnegative component ui (x, t) means limsup/t→∞ ∫B ui (x, t) dx \u3e 0 versus system persistence of nonnegative components ui (x, t) which means limsup/t→∞ ∫B ui (x, t) dx \u3e 0, i = 1,..., n , provided solutions exist on B x [0, ∞) . Weak and strong persistence are defined also for this setting. Some of the same properties of solution behavior are established for the continuous reaction-diffusion systems as for the reaction systems without diffusion. The significance of the type of diffusion mechanism is illustrated by comparing numerical solutions to the logistic random, biased, and directed diffusion models. For the Neumann problem numerical solutions converge to the homogeneous equilibrium (spatially independent), but the rates of convergence differ depending on the type of diffusion. For the homogeneous Dirichlet problem numerical solutions to the random diffusion model tend to zero, however numerical solutions to both the biased and directed diffusion models tend to a positive heterogeneous equilibrium solution. The main tool employed to determine the persistence and extinction criteria is differential inequalities. The Comparison Principle of ordinary differential equation theory and the Maximum Principle of partial differential equation theory are used to prove many of the persistence and extinction results

Phasing Into Retirement

Employers have been launching phased retirement programs to help workers navigate the transition from work to retirement more effectively. This paper examines the experience of the phased retirement system for tenured faculty in the University of North Carolina system. After phased retirement was introduced, there was a sizable increase in the overall separation rate in the system. A multinomial logit model of the retirement decision as a function of pension incentives, employee performance, demographics, and campus characteristics is developed. The key empirical result is that the odds of entering phased retirement are strongly and inversely related to employee performance, as measured by recent pay increases.

The Informational Efficiency of the Equity Market As Compared to the Syndicated Bank Loan Market

To our knowledge, this is the first paper to examine the informational efficiency of the equity market as compared to the syndicated bank loan market. The loan market is a private market comprised of financial institutions with access to private information. We test whether this is reflected in informationally efficient price formation in the loan market vis a vis the equity markets, and reject this private information hypothesis. We find support for a liquidity hypothesis, suggesting that equity markets lead loan markets, despite bank lenders’ access to private information, because of greater liquidity in equity markets. Only when equity markets are relatively illiquid do we find evidence supporting the private information hypothesis. Finally, we find evidence of abnormal returns if portfolios are constructed using lagged equity returns to designate investments in the syndicated bank loan market