Statement no.134 a proposal for privatization of the Federal Home Loan Bank system

Statement no.134 a proposal for privatization of the Federal Home Loan Bank systemMay 6, 1996     

A unifying approach to risk-measure-based optimal reinsurance problems with practical constraints

The design of optimal reinsurance treaties in the presence of multifarious practical constraints is a substantive but underdeveloped topic in modern risk management. To examine the influence of these constraints on the contract design systematically, this article formulates a generic constrained reinsurance problem where the objective and constraint functions take the form of Lebesgue integrals whose integrands involve the unit-valued derivative of the ceded loss function to be chosen. Such a formulation provides a unifying framework to tackle a wide body of existing and novel distortion-risk-measure-based optimal reinsurance problems with constraints that reflect diverse practical considerations. Prominent examples include insurers’ budgetary, regulatory and reinsurers’ participation constraints. An elementary and intuitive solution scheme based on an extension of the cost–benefit technique in Cheung and Lo [Cheung, K.C. & Lo, A. (2015, in press). Characterizations of optimal reinsurance treaties: a cost–benefit approach Scandinavian Actuarial Journal. doi:10.1080/03461238.2015.1054303.] is proposed and illuminated by analytically identifying the optimal risk-sharing schemes in several concrete optimal reinsurance models of practical interest. Particular emphasis is placed on the economic implications of the above constraints in terms of stimulating or curtailing the demand for reinsurance, and how these constraints serve to reconcile the possibly conflicting objectives of different parties.     

Boundary spanner multi-faceted role ambiguity and burnout: An exploratory study

Although researchers have gained considerable knowledge regarding the multi-faceted manifestation of burnout over recent years, inconsistent findings of role ambiguity as an antecedent to burnout are still prevalent. Given the complex boundary-spanning nature of sales, it is likely that global measures of role ambiguity fail to fully capture the domain and impact of role ambiguity. To help address this gap, this study provides initial evidence that facets of role ambiguity impact burnout manifestation in the sales role differently. Specifically, findings provide a foundation to help mitigate the negative impact of burnout by focusing on only certain facets of role ambiguity.     

A New Spin on the Jumbo/Conforming Loan Rate Differential

This article uses house-price transaction data to estimate volatility in house prices. The volatility parameter is an input into a mortgage-pricing model that is used to simulate the contract interest rate that balances the mortgage contract. By segmenting the house-price transaction into high- and low-valued homes, we are able to estimate a theoretical jumbo/conforming loan rate differential. Simulation results demonstrate that the differences in volatility between high- and low-priced homes can produce a contract loan rate differential, holding all else constant. The article also presents a discussion of the problems inherent to estimating volatilities form assets with infrequent trades and long holding periods.     

Delinquency,schooling, and work: time allocation decision of youth

This paper examines the possible factors that affect the time allocation decision of youth between delinquency, schooling, and work. Based on a joint decision model, evidence from Montreal shows that influences from different social institutions such as family, church, school, peers and the workplace are important determinants of how young people decide to spend their time on various activities. The findings provided here take into account the joint decision nature of the problem and therefore provide more precise estimates than those of the existing literature.     

An empirical analysis of home equity loan and line performance

Given the growth in home equity lending during the 1990s, it is imperative that lenders and regulators understand the risks associated with this segment of the residential mortgage market. Using a unique panel data set of over 135,000 homeowners with second mortgages, our analysis indicates that significant differences exist in the prepayment and default probabilities of home equity loans and lines, providing insights into bank minimum capital requirements. We find that households with equity loans are relatively more sensitive to changes in interest rates. By contrast, households with equity lines are more sensitive to appreciation in property value.     

Local economic risk factors and the primary and secondary mortgage markets

This paper presents a cross-sectional analysis of the spatial distribution of loans in the primary and secondary mortgage markets. Aggregating loan originations to the MSA level, we examine the proportion of the market served by FHA and conventional lenders. We model the geographic differences in market shares as a function of supply, demand, and economic risk factors. Results indicate that FHA market shares are higher in cities with higher economic risk characteristics. To examine the role of GSE activity, we model the spatial distribution of the disposition of conventional loans. Again, we focus on the impact of local economic risk factors on the proportion of loans purchased by the GSEs, purchased by other financial institutions, or retained by the originating lender. Our results indicate that GSEs purchase rates are fairly insensitive to local economic conditions indicating that they serve the primary market with little spatial variation.     

Measuring Potential GSE Funding Advantages

As the size of government sponsored enterprises (GSE) has grown, attention has focused on the relationship between the federal government and the GSEs, with particular attention focused on estimating the impact of this relationship on GSE debt costs. Quantifying the GSEs cost advantage is a controversial exercise with several competing methodologies providing divergent values. Thus, this paper reviews the methods that have been utilized in previous studies and recommends an alternative approach that overcomes many of the criticisms of previous work. By using offering yields on GSE debt, we find that the three housing GSEs enjoyed an average advantage of between 25 and 29 basis points over AA banking sector bonds, between 43 and 47 basis points over A rated bonds, and between 76 and 80 basis points over BBB rated banking issues. We find that our results are robust to both the basic approach taken as well as to model specification.     

Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?

Banks can choose to keep loans on balance sheet as private debt or transform them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still retain a portion of their loans in portfolio. Do lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in portfolio? If riskier loans are indeed retained in portfolio, is this motivated by regulatory capital incentives (regulatory capital arbitrage), or a concern for reputation? We examine these questions empirically and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with either the capital arbitrage or reputation explanation for securitization.     

Bank and Nonbank Lenders and the Commercial Mortgage Market

This paper develops an equilibrium model of the commercial mortgage market that includes the sequence from commitment to origination and allows testing for differences by type of lender. From borrowers, loan demand is based on the income yield, capital gains, and expectations about return distributions. Lenders use prices such as mortgage rates and their distributions, and quantities in underwriting standards. There are separate equilibria in the markets for loan commitments and originations. Bank and nonbank lenders are not restricted to the same lending technology, nor to the weights placed on mortgage rates as opposed to underwriting standards. Empirical results for the United States commercial mortgage market indicate that banks use interest rates in allocating credit while nonbanks rely on underwriting standards, notably the loan-to-value ratio. A consequence is that nonbanks have a clientele incentive towards making low cap rate loans compensated by low loan-to-value ratios.