The costs of lead bank–distressed borrower relationships: evidence from commercial lending in Taiwan

This is the first study to investigate the impact of the adjudication of a borrower's reorganisation filing on the shareholder wealth of the lead bank. The results reveal that the market is acutely sensitive to adverse information and the reorganisation adjudication of a borrower's plan has a detrimental effect on the reputation and wealth of the lead bank. Further, while both are positively associated with wealth effects, the RATE of the loan-level variable is more highly related than the LEVERAGE of the borrower-level variable to wealth loss. Additionally, large lenders experience less wealth loss. The higher the bank debt of a firm, the higher the adverse abnormal returns to the lead bank. Higher collateral and rates on loans are used to compensate for the greater risk of the loan portfolio. Likewise, the market may view lead banks with high loan loss reserves as banks that are not particularly adept at identifying creditworthy borrowers.     

The Role of the Banking System in the International Transmission of Shocks

The paper analyzes the role of the banking system in the international transmission of financial shocks. A channel of transmission is defined as a mechanism through which a financial crisis in one country induces a financial crisis in another country. Channels involving banks operate through changes in the capital adequacy ratios of a common lender and in the value of collateral of domestic borrowers, through bank runs and bank panics, and through moral hazard. Recent empirical evidence points to the significant effects of the common lender channel on the probability of a financial crisis, while mitigating the role of bank runs and remaining inconclusive about moral hazard. Thus, we introduce a series of indices of vulnerability to the common lender channel that improve existing measures by taking into account both the borrower's dependence on foreign loans and the lender's exposure to a single country. By comparing the degree of vulnerability to the common lender channel during the 1990s major crises, we find that vulnerability was higher in the Asia Pacific region in 1997 (and, especially, in the five countries most involved in the crisis) than in Latin America and East Europe. Vulnerability was significantly lower in 2000 for almost all the countries in our sample, due to both a more even distribution of liabilities on the part of developing countries and a higher degree of diversification of bank investments from the three main lending countries (United States, Japan, Germany).     

An analysis of bank stock price reaction to distressed borrowers: Taiwanese evidence

This paper investigates the impacts of a borrower's reorganisation plan confirmation on its lending bank's shareholder wealth. Earlier empirical research is completely silent on this research area. Using data from a sample of Taiwanese reorganised firms, this paper shows that the market discriminates among lending banks by making inferences based on their exposure to their reorganised borrower; that is, the lead lending banks experience negative wealth effects, whereas the second lending banks experience positive effects. The results also show that wealth effects are negatively related to loan collateral and rates charged on the loans as well as on corporate leverage. In addition, the reliability and robustness of the model are demonstrated by the receiver operating characteristic curves.     

Optimal monetary policy in a currency union with interest rate spreads

We introduce “financial imperfections” – asymmetric net wealth positions, incomplete risk-sharing, and interest rate spreads across member countries – in a prototypical two-country currency union model and study implications for monetary policy transmission mechanism and optimal policy. In addition to, and independent from, the standard transmission mechanism associated with nominal rigidities, financial imperfections introduce a wealth redistribution role for monetary policy. Moreover, the two mechanisms reinforce each other and amplify the effects of monetary policy. On the normative side, financial imperfections, via interactions with nominal rigidities, generate two novel policy trade-offs. First, the central bank needs to pay attention to distributional efficiency in addition to macroeconomic (and price level) stability, which implies that a strict inflation targeting policy of setting union-wide inflation to zero is never optimal. Second, the interactions lead to a trade-off in stabilizing relative consumption versus the relative price gap (the deviation of relative prices from their efficient level) across countries, which implies that the central bank allows for less flexibility in relative prices. Finally, we consider how the central bank should respond to a financial shock that causes an increase in the interest rate spread. Under optimal policy, the central bank strongly decreases the deposit rate, which reduces aggregate and distributional inefficiencies by mitigating the drop in output and inflation and the rise in relative consumption and prices. Such a policy response can be well approximated by a spread-adjusted Taylor rule as it helps the real interest rate track the efficient rate of interest.     

Determinants of bribery in international business

Levels of perceived bribe taking in 54 countries in two time periods were analyzed with respect to two independent variables—their level of human development measuring education, wealth, and health (Human Development Index) and the level of economic freedom measuring the extent to which a nation's economy is open to market forces. The results indicate that lower levels of bribe taking are associated with high human development and greater economic freedom. Developed countries that have shown improvements on the two variables over a five‐year period also show a reduction in their perceived levels of bribe taking. © 2004 Wiley Periodicals, Inc.     

MULTIDIMENSIONAL PORTFOLIO OPTIMIZATION WITH PROPORTIONAL TRANSACTION COSTS

We provide a computational study of the problem of optimally allocating wealth among multiple stocks and a bank account, to maximize the infinite horizon discounted utility of consumption. We consider the situation where the transfer of wealth from one asset to another involves transaction costs that are proportional to the amount of wealth transferred. Our model allows for correlation between the price processes, which in turn gives rise to interesting hedging strategies. This results in a stochastic control problem with both drift-rate and singular controls, which can be recast as a free boundary problem in partial differential equations. Adapting the finite element method and using an iterative procedure that converts the free boundary problem into a sequence of fixed boundary problems, we provide an efficient numerical method for solving this problem. We present computational results that describe the impact of volatility, risk aversion of the investor, level of transaction costs, and correlation among the risky assets on the structure of the optimal policy. Finally we suggest and quantify some heuristic approximations.     

Credit risk and bank competition in Sub-Saharan Africa

This paper investigates the relationship between bank competition and stability in Sub-Saharan Africa. Using financial statements on 221 banks from 33 countries over the period 2000–15, we provide evidence for a U-shaped relationship between bank competition and credit risk. Up to a certain threshold, higher levels of bank competition are associated with lower credit risk. Above this threshold, more competition increases credit risks as the positive effects of competition are outweighed by the adverse effects of rising competition. The optimal threshold appears to be higher for African banks compared to banks from developed countries. We also find that credit risk in Sub-Saharan Africa is not only related to macroeconomic determinants, such as growth, public debt, economic concentration and financial development, but also to the business and regulatory environment. In particular, bank risks appear to be lower in countries where credit registry coverage is higher and the tenure of supervisors is shorter.     

New Dimensions of Financial Liberalization in Japan

This article contrasts the development of Japanese financial institutions over the past 50 years to that of the United States and compares the two countries’ household savings behavior. Although reform and liberalization is driving the Japanese financial sector to become more open and more sophisticated, there are powerful reasons for the Japanese system and Japanese asset-holding behavior to remain divergent from that of the United States. One major factor is that income and wealth in Japan are distributed much more evenly than in the United States. Since wealthy households are more sophisticated and better able to accommodate risk, the concentration of wealth in the United States means that, compared to Japan, there are more high income/high wealth households that are willing to take on risk from equity and bond holdings. In Japan, in contrast, there is a much heavier reliance on bank deposits. Even though financial institutions in the two countries are becoming more similar, the persistent differences in income distribution are likely to lead to persistent differences in asset holding and the composition of capital markets in the two countries. JEL Classification G2, O53     

Pricing IMF liquidity provision: The value of the IMF liquidity commitment

This paper presents a market-based framework for pricing the International Monetary Fund's commitment to provide liquidity assistance, accounting for the credit risk and the insurance benefit involved in such operations. It is based on the isomorphic correspondence between Fund liquidity and common stock put options. The illustrative numerical examples show that the value of this liquidity guarantee could range between several and three hundreds basis points depending on the borrower's creditworthiness, the volatility of capital flows to the borrowing country, and the amount of funds potentially needed to meet the borrower's external obligations.     

MONOTONICITY PROPERTIES OF OPTIMAL INVESTMENT STRATEGIES FOR LOG-BROWNIAN ASSET PRICES

Consider the geometric Brownian motion market model and an investor who strives to maximize expected utility from terminal wealth. If the investor's relative risk aversion is an increasing function of wealth, the main result in this paper proves that the optimal demand in terms of the total wealth invested in a given risky portfolio at any date is decreasing in absolute value with wealth. The proof depends on the functional form of the Brunn–Minkowski inequality due to Prékopa.     

Einkommens- und Vermögensverteilung — zu ungleich?

The distribution of income and wealth in Germany grew increasingly unequal until the beginning of the financial crisis. But inequality has not risen in either Germany or Switzerland since 2005. Nevertheless, Germans overestimate inequality. The German gap between reality and perception of inequality is important to investigate, as the subjective assessment of inequality influences redistribution preferences. Rising inequality may damage social stability and democracy, but it is unclear whether economists are able to assess a “proper and just” distribution. Interdependencies are discussed: Does a more equal distribution create negative effects on economic growth? How does Germany rank internationally with regard to distribution? Social mobility rates differ substantially across countries; what are the implications for economic policy?     

International Inequality and the COVID-19 Pandemic

The lockdowns and stimulus programmes that governments have adopted to fight the COVID-19 pandemic and the associated economic crisis have affected the distribution of income and production within and between countries. Considering both, current evidence indicates that the EU-wide and global inequality of disposable income did not change dramatically in 2020. However, the unequal impact on the wealth and health of people is likely to worsen income inequality in the future.

     

When the American dream fails: The effect of perceived economic inequality on present-oriented behavior

Economic inequality is worsening worldwide and is associated with various social problems. Although research on inequality has been conducted in various academic fields, research on how perceived inequality affects individual decision making is relatively limited in the marketing field. Recognizing this gap, this study examines how perceived economic inequality can affect individual behavior and decision making from the perspective of time frame. The results of four studies reveal that perceived economic inequality can induce present-oriented behavior and suggest that perceived economic mobility accounts for this relationship. This study demonstrates that present-oriented and shortsighted behaviors, which are usually considered characteristics of the poor, can occur due to the perceptions of the environment beyond class. It implies that the macro level of economic inequality can influence an individual's decision making at the micro level.     

The elusive effect of bank size on profits

This study investigates the determinants of bank profit while paying particular attention to the influence of market share on profit, referred as the market share effect. The research seeks to answer the question whether the market share effect is conditional upon four country institutional factors including concentration ratio, bank regulations, the government's governance and country wealth, and is thus better in explaining the mixed results in the literature. This study employs comprehensive data of 44 countries from 1998 to 2004. The results show that market share positively influences profit when no country institutional factors are considered, but further strengthened in countries that are characterized by high concentration ratios, high restrictions on bank activities in insurance and real estate, good investor protection and a strong rule of law.     

Who Benefits from Workers with General Skills? Countervailing Incentives in Labour Contracts

In a principal–agent model with adverse selection and moral hazard the impact of the agent's transferable human capital on incentives is analysed. It is shown that under asymmetric information the employer (principal) prefers a worker (agent) with general skills to a similarly productive worker with firm‐specific skills although the reservation utility of a worker with general (i.e. marketable) skills is higher. The principal's information costs are lower when workers have general skills than in the case where workers possess only firm‐specific human capital because of countervailing incentives. The optimal contract for workers with general skills differs from the standard screening contract in that it involves pooling.     

Consumption and Portfolio Selection with Labor Income: A Continuous Time Approach

This paper studies the consumption and portfolio selection problem of an agent who is liquidity constrained and has uninsurable income risk. The paper investigates how the optimal consumption and asset allocation policies deviate from the case where the financial market is perfect, i.e., the case where there are no liquidity constraints and uninsurable income risk. In particular, the paper shows that, for a given level of financial wealth and labor income, optimal consumption is smaller and the optimal level of risk taking is lower in the case where the agent is liquidity constrained and has uninsurable income risk than in the case where the financial market is perfect. The paper also discusses how the agent assesses the value of lifetime labor income and relates this evaluation to optimal consumption and asset allocation policies.     

对外开放与国内财富分配不均间的传导机制研究

现阶段我国国内财富分配不均主要受制度转型和对外开放的影响,然而目前人们把精力主要放在对制度转型的研究上,在很大程度上忽视了对外开放的影响。本文从理论和实证角度深入分析了对外开放与我国国内财富分配不均之间的传导机制。进而指出,我国应在充分肯定对外开放对国民经济的巨大贡献、继续坚定不移地进行对外开放的同时,须采取必要措施降低对外开放对国内财富分配不均的推动性影响。     

国有商业银行核心竞争力现状分析

银行资本是银行经营的首要条件。我国国有商业银行的资本充足率一直不容乐观 ,且存在创新能力整体水平差 ,风险意识淡薄 ,风险管理组织结构不完善 ,人才严重匮乏等弊端。核心竞争力是核心能力和核心资源相互整合的结果。我国国有商业银行当务之急是尽快克服现存的弊端 ,整合核心资源 ,形成并提高核心竞争力     

The Effect of Corruption on Japanese Foreign Direct Investment

In an effort to reduce risk and uncertainty, we hypothesize that investors avoid countries where high corruption exists. We investigate this issue by examining the relationship of levels of perceived corruption on Japanese Foreign Direct Investment (FDI) in both industrialized and emerging economies. The analysis presented utilizes a sample of 29,546 investments in 59 countries. Results suggest that in emerging nations, where comprehensive legal and regulatory frameworks do not exist to effectively curtail fraudulent activity, corruption serves to reduce FDI. Managers need to consider the level of perceived corruption in their assessment of any market prior to potential investment.     

Revisiting the impact of institutional quality on post-GFC bank risk-taking: Evidence from emerging countries

This is the first attempt to address the impact of institutional quality on post-GFC bank risk-taking behavior. This study is conducted on 730 banks from 19 emerging countries covering the period 2011–2016. We used six indicators of good governance as a proxy for institutional quality. Both static panel and Dynamic GMM estimation are used to identify the impact of these variables on bank risk-taking; measured by Z-score. We evidenced that increasing government effectiveness, controlling corruption, and improving agents' confidence and adherence to the rule of law reduce banks' risk exposure and improve banks' stability. Besides supporting the Z-score model, the robustness test using σ(NIM) also provides evidence of the impact of regulatory quality on reducing bank risk. Surprisingly, both models tend to indicate that improving voice and accountability increase bank risk-taking in emerging countries. Furthermore, our study provides an interesting reconciliation to the major debate on the impact of size on bank risk.