DETERMINANTS OF BANK HOLDING COMPANY DEBT RATINGS

This paper reports on the construction of a multiple discriminant analysis model which explains the specific ratings assigned by Standard and Poor's Corporation to bank holding company (BHC) capital notes and debentures. It thus investigats the ratings of debt securities issued by banking organizations, an area largely ignored in bond rating research to date. Improving on the methodology of current research concerning BHC bond ratings, the model is 78.5 percent accurate in initially classifying the top three rating categories—AAA, AA, and A. Lachenbruch validation finds the model to be 64.6 percent accurate. Size, variability of net income, the economic environment of the issuing BHC, and the amount and composition of total capital appear to be the principal variables allowing successful discrimination among the debet issue ratings.     

DETERMINANTS OF VALUATION EFFECTS FOR SECURITY OFFERINGS OF COMMERCIAL BANK HOLDING COMPANIES

In this study, the impact of security issuance by bank holding companies is examined in light of two hypotheses: the regulation or asymmetry reduction hypothesis and the bank capital hypothesis. Announcements of the issuance of common stock are associated with a significant negative effect, and the magnitude of this effect is similar to that found previously for utilities and smaller than that found for industrial firms. The market does not appear to treat subordinated debt announcements as similar to equity, although the debt qualifies as “capital” for regulatory purposes. Cross-sectional regressions do not support asymmetric information models where all unexpected external announcements are viewed negatively. Rather, the type of security being issued is an important determinant of the announcement effect.     

A MARXIST CRITIQUE OF THE FASB'S CONCEPTUAL FRAMEWORK

In developing its conceptual framework the FASB challenged supporters of traditional accounting to provide objective and operational definitions of the elements of financial statements that do not depend on definitions of assets and liabilities as future economic benefits. The paper answers this challenge by deriving a general theory of accounting from Marx's analysis of the circuit of industrial capital. It concludes that whereas the FASB's framework, based on the marginalist idea of economic value, is subjective and vague, the Marxist theory of financial accounting derived here provides critical accounting with a scientific foundation.     

THE EFFECTS OF BORROWING ON THE RATE OF GROWTH OF CAPITAL AND THE RISK OF RUIN OF A FIRM

The research reported in this paper used Monte Carlo simulation to study the long term effects of borrowing policy on the rate of growth of capital and the risk (probability) of ruin of hypothetical firms, operating in explicitly described, realistic capital budgeting environments. The capital rationing environment is described explicitly. The debt policies modeled were based on the results of interviews with senior financial executives in eight major firms. The results indicate that three intuitively appealing ranking procedures performed equally well and all out-performed a random selection decision procedure: yielding higher rates of capital growth with lower risks of ruin. In general, an aggressive borrowing policy resulted in a higher average capital growth rate for a firm but a conservative borrowing policy resulted in a lower risk of ruin. It is believed that the results provide some interesting insights which indicate that a computer simulation model could be used to aid management in the evaluation of their capital budgeting procedures and borrowing policies.     

RETHINKING BANK REGULATION: A REVIEW OF THE HISTORICAL EVIDENCE

The debate over bank powers has taken on special urgency with the recent flurry of proposed mergers, such as the Citicorp-Travelers Group combination, that would break down the barriers between commercial and investment banking. After more than a decade of failed attempts to expand the scope of permissible bank activities, the House of Representatives recently voted for the first time in favor of a bill to end these Depression era limitations. The issue will be taken up by the Senate this fall. Most of the rationales for regulating banks fall into two broad categories: (1) the need to control potential conflicts of interest stemming from banks' multiple roles as deposit-takers, lenders, securities underwriters, and investment advisers; and (2) the perceived need to protect against the possibility of bank panics and widespread financial instability. In reviewing the historical evidence compiled by banking and finance scholars over the years, this article finds remarkably little cause for concern and suggests the regulatory cure may be far worse than the disease. On the first issue, the article cites a number of recent studies suggesting that market forces deal more effectively than regulation with conflicts of interests that can arise when commercial banks are engaged in securities underwriting. Contrary to the conventional wisdom, investors during the pre-Glass-Steagall era appear to have been better off when they purchased securities from commercial banks rather than investment banks. Moreover, to enhance their credibility in the market, many commercial banks during this period chose to put some distance between their lending and underwriting activities by establishing separate securities affiliates, thereby creating voluntary “firewalls.” In examining the issue of how the expansion of bank powers would affect economic stability, the second half of the article cites a large body of research–including studies of different historical periods and countries–attesting to the durability of commercial (and universal) banking systems. Indeed, one of the most important findings issuing from this research is that the regulatory safety net has often had the unfortunate impact of undermining rather than promoting financial stability.