Government real estate interventions and the stock market

We study the spillover of government interventions in the real estate market to the stock market. We find that the more active mutual funds decreased ownership in equities with no short-term reversal. Furthermore, they increased ownership in the finance sector stocks without significant changes to their real estate equity holdings. The interventions affecting the riskiness of the finance sector stocks triggered a larger trading response than the ones focused on the real estate sector stocks’ cash flows. Overall, the spillover of the housing market shocks to the stock market seems to be materialized mostly through the discount rate channel.     

Risk management of real estate: The case of real estate swaps

Real estate swaps are a recent financial innovation based upon the principle of comparative advantage. A real estate swap is a useful tool for real estate risk management and for participating in real estate investment without the high costs associated with real estate. Potential economic benefits and costs associated with real estate swaps are considered and real estate swaps are compared to alternative tools for real estate risk management. The expected utility and effectiveness of risk management with a swap in a multiperiod framework are analyzed. The analysis finds that the subject property's return and its risk characteristics (as reflected in its correlation with interest rate and property index returns) delimit the risk management potential of a given swap position. Optimal swap positions are shown for various regions and property types based on historical return series, from the period between 1983 and 1992, and the parameters of the dynamic model developed.     

The accuracy of real estate indices: Repeat sale estimators

Simulation techniques allow us to examine the behavior and accuracy of several repeat sales regression estimators used to construct real estate return indices. We show that the generalized least squares (GLS) method is the maximum likelihood estimator, and we show how estimation accuracy can be significantly improved through a Baysian approach. In addition, we introduce a biased estimation procedure based upon the James and Stein method to address the problems of multicollinearity common to the procedure.     

The tax-induced holding periods of real estate Investors: Theory and empirical evidence

This article reexamines holding period decisions in real estate investment. It develops and empirically tests a holding period model recognizing not only taxes but also refinancing and investor-specific determinants. Based on a sample of over 1,000 real estate transactions with observed holding periods, the results of our tests support the conclusion that investors' consumption and investment preferences and prevailing market interest rates are more important than tax issues in determining the holding periods of real estate investors.     

Assessing the effectiveness of financial reporting harmonization for emerging market banks: The case of Banco Serfin

In the last decade there has been a proliferation of financial crises in emerging markets. To some extent, the suddenness and magnitude of some of these crises have been blamed on poor financial reporting standards for bank loan losses. As a result, prior to providing countries with “financial bailout” funds, international investors and international financial organizations have increasingly required that countries harmonize their bank financial reporting standards with international financial reporting standards.Given this trend, this case requires students to assess the effectiveness of efforts to harmonize loan financial reporting (with International Financial Reporting Standards) for Mexican banks during (and after) the country’s financial crisis of the late 1990s. Students are required to assess the extent to which both pre-crisis standards as well as new, post-crisis standards complied with international financial reporting standards. They are also required to assess the impact of the new standards on the reporting practices for loans of one particularly troubled financial institution. Through the examination of this institution’s accounting practices for loans, students obtain a familiarity of the shortcomings of emerging markets’ banks’ loan financial reporting as well as the factors which influence the adoption of international financial reporting standards by emerging market banks.     

The impact of financing decisions on the security returns of real estate corporations

This research investigates the valuation impact of financing decisions on the common stock of real estate corporations. We compare the results of our study with the results of similar studies in the corporate finance literature to test whether the response to security offerings by real estate firms differs systematically from the response to offerings by industrial and utility firms. The results of this study indicate a generally favorable price response to straight bond announcements, and unfavorable responses to common stock, convertible bonds, and lines of credit announcements.     

How to deal with real estate booms: Lessons from country experiences

The financial crisis showed, once again, that neglecting real estate booms can have disastrous consequences. In this paper, we spell out the circumstances under which a more active policy agenda on this front would be justified. Then, we offer insights on the pros and cons as well as implementation challenges of various policy tools that can be used to contain the damage to the financial system and the economy from real estate boom–bust episodes. These insights derive from econometric analysis, when possible, and case studies of country experiences. Broadly, booms financed through credit and involving leverage are more likely to warrant a policy response. In that context, macroprudential measures can be targeted more precisely to specific sources of risk, but they may prove ineffective because of circumvention. In that case, monetary policy may have to be used to lean against the wind.     

The contribution of (shadow) banks and real estate to systemic risk in China

We empirically evaluate how accounting and financial variables affect the level of systemic risk in traditional and shadow banks, and in real estate finance services in China over the period 2006–2019. We also conduct some stability analysis by evaluating the impact of crisis sub-periods. We find that systemic risk increases in the Size of large financial institutions, particularly shadow entities, while it is insensitive to the Size of real estate finance services. Real estate finance services are instead particularly sensitive to Maturity Mismatch and Leverage. Finally, systemic risk differs across state and non state owned banks.     

The wealth effects of real estate transactions: The case of REITs

Recent literature analyzing corporate acquisitions and sales of real estate has shown that statistically significant gains accrue to both buyers and sellers when the transaction is announced. In this paper, we focus solely on the real property transactions of tax-qualified Real Estate Investment Trusts (REITs) to determine if REIT shareholders experience a similar pattern of positive wealth effects. We find that REITs do not experience any significant wealth effects from transaction announcements. However, we provide evidence that a significant positive wealth effect does occur upon the announcement of a sale transaction when the sale is associated with an increase in REIT dividends.     

Empirical analysis of the average asset correlation for real estate investment trusts

The credit risk capital requirements within the current Basel II Accord are based on the asymptotic single risk factor (ASRF) approach. The asset correlation parameter, defined as an obligor's sensitivity to the ASRF, is a key driver within this approach, and its average values for different types of obligors are to be set by regulators. Specifically, for commercial real estate (CRE) lending, the average asset correlations are to be determined using formulas for either income-producing real estate or high-volatility commercial real estate. In this paper, the value of this parameter was empirically examined using portfolios of U.S. publicly-traded real estate investment trusts (REITs) as a proxy for CRE lending more generally. CRE lending as a whole was found to have the same calibrated average asset correlation as corporate lending, providing support for the recent U.S. regulatory decision to treat these two lending categories similarly for regulatory capital purposes. However, the calibrated values for CRE categories, such as multi-family residential or office lending, varied in important ways. The comparison of calibrated and regulatory values of the average asset correlations for these categories suggests that the current regulatory formulas generate parameter values that may be too high in most cases.     

Statistical properties of returns: Financial assets versus commercial real estate

This study examines the distribution of commercial real estate returns by region (east, midwest, south, and west), by property type (office, retail, R&D office, and warehouse) and in the aggregate, and compares their distributions to those of financial assets. Nominal and real returns are examined for quarterly, semiannual, and annual periods. The quarterly nominal returns on the financial assets are mostly normal with very little indication of autocorrelation. In contrast, non-normality and autocorrelation are present in most of the nominal quarterly real estate series. The non-normality is greatly reduced when semiannual or annual returns are considered or when the quarterly series are corrected for autocorrelation. The non-normality is also lower for real returns than it is for nominal returns.     

The crowding out effect of booming real estate markets on corporate TFP: evidence from China

This paper explores the impact of housing price appreciation on corporate total factor productivity (TFP) in Chinese A‐share listed corporations. Results show that increasing real estate prices negatively affect corporate TFP. Meanwhile, we find that the deterring effect is especially significant for state‐owned enterprises (SOEs), large corporations and manufacturing corporations. This research further provides suggestive evidence that managerial myopia may be one potential explanation for the crowding out effect of increasing housing prices. When home purchase is under restriction, however, the negative impact of rising housing prices on corporate TFP declines sharply. This study illustrates the efficiency cost of China's booming real estate market.     

Implications of bank regulation for loan supply and bank stability: a dynamic perspective

ABSTRACT

We show that internal funds play a particular role in the regulation of bank capital, which has not received much attention, yet. A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and its future vulnerability to bankruptcy risks. Using a partial equilibrium model, we study how internal funds affect these intra- and intertemporal links. Moreover, our positive analysis identifies the effects of risk-weighted capital-to-asset ratios, liquidity coverage ratios and regulatory margin calls on the dynamics of internal funds and thus loan supply and bank stability. Only regulatory margin calls or large liquidity coverage ratios achieve bank stability for all risk levels, but for large risks a bank will stop credit intermediation.     

The impact of changes in bank ownership structure on the allocation of capital: International evidence

A new wave of bank privatizations in the past decade has significantly changed the ownership structure of banking systems around the world. This paper explores how these changes affect the allocation of capital within countries. Increases in domestic blockholder ownership of banks adversely affect the allocation of capital through increased lending activity to less productive industries and to those with less dependence on external finance. This result is more pronounced in countries with higher levels of corruption. I find some evidence that foreign presence improves capital allocation efficiency by increasing lending to more productive industries, primarily in common law countries.     

The influence of accounting enforcement on earnings quality of banks: Implications of bank regulation and the global financial crisis

We study the effects of country-level accounting enforcement on earnings quality of banks and whether bank regulation substitutes or complements the effect of accounting enforcement on bank earnings quality. We also examine whether the influence of accounting enforcement on bank earnings quality changed after the global financial crisis. Using a sample of listed banks from 40 countries between 2001 and 2014, and abnormal loan loss provisions (ALLP) as our main proxy for earnings quality, we document a consistent and strong association between accounting enforcement and bank earnings quality. More specifically, an increase in accounting enforcement decreases the level of ALLP and decreases the propensity to manage earnings to avoid losses. Furthermore, we provide empirical evidence that bank regulation complements the effect of accounting enforcement on bank earnings quality. Finally, unlike in the pre-crisis period, we find a positive association between accounting enforcement and income-decreasing ALLP in the post-crisis period, which indicates that stronger accounting enforcement is associated with more conservative earnings and higher loan loss reserves. Overall, our results indicate that accounting enforcement reduces opportunistic earnings management.     

Bank regulation and international financial stability: A case against the 2006 Basel framework for controlling tail risk in trading books

In attempting to promote international financial stability, the Basel Committee on Banking Supervision (2006) provided a framework that sought to control the amount of tail risk that large banks around the world would take in their trading books relative to their corresponding minimum capital requirements. However, many of these banks suffered significant trading losses during the recent financial crisis. Our paper examines whether the Basel framework allowed banks to take substantive tail risk in their trading books without a capital requirement penalty. We find that it allowed banks to do so and that its minimum capital requirements can be notably procyclical. Hence, focusing on the way the Basel framework sought to control the amount of tail risk in trading books relative to their corresponding minimum capital requirements, our paper supports the view that it was not properly designed to promote financial stability. We also discuss alternative regulatory frameworks that would potentially be more effective than the Basel framework in preventing banks from taking substantive tail risk in their trading books without a capital requirement penalty.     

The systemic risk of European banks during the financial and sovereign debt crises

European banks became a source of risk to global financial markets during the financial crisis and attention to the European banking sector increased during the sovereign debt crisis. To measure the systemic risk of European banks, we calculate a distress insurance premium (DIP), which integrates the characteristics of bank size, probability of default, and correlation. Based on this measure, the systemic risk of European banks reached its height in late 2011 around €500 billion. We find that this was largely due to sovereign default risk. The DIP methodology is also used to measure the systemic contribution of individual banks. This approach identifies the large systemically important European banks, but Italian and Spanish banks as a group notably increased in systemic importance during the sample period. Bank-specific fundamentals like capital-asset ratios predict the one-year-ahead systemic risk contributions.     

Macro-financial determinants of the great financial crisis: Implications for financial regulation

We provide a cross-country and cross-bank analysis of the financial determinants of the Great Financial Crisis using data on 83 countries from the period 1998 to 2006. First, our cross-country results show that the probability of suffering the crisis in 2008 was larger for countries having higher levels of credit deposit ratio whereas it was lower for countries characterized by higher levels of: (i) net interest margin, (ii) concentration in the banking sector, (iii) restrictions to bank activities, (iv) private monitoring. The bank-level analysis reinforces these results and shows that the latter factors are also key determinants across banks, thus explaining the probability of bank crisis. Our findings contribute to extend the analytical toolkit available for macro and micro-prudential regulation.     

从金融危机看我国商业银行综合经营的变革方向

金融危机中美国金融机构遭受重创的自身原因是,公司治理失效及过度的激励机制,缺乏严格的内部风险管理机制,规模快速扩张带来整合和管理的巨大难题。同时,美国计划改革其金融监管体制,发布了《现代化金融监管体制蓝图》和《金融改革框架》。欧美金融机构的转型,尤其是花旗分拆不意味着综合经营模式的失败;基于金融深化发展和适应全球金融竞争的考虑,我国商业银行应当坚持综合经营和金融创新,金融监管的变革方向应是对金融创新带来的风险实施更加有效的监管。     

A real options approach for evaluating the implementation of a risk-sensitive capital rule in banks

I evaluate a bank's incentives to implement a risk-sensitive regulatory capital rule. The decision making is analyzed within a real options framework where optimal policies are derived in terms of threshold levels of credit risk. I provide a numerical example for the implementation of internal ratings based models for credit risk (the IRB approach) under the new Basel Accord (Basel II).