An Analysis of Bank Loan Rate Indexation

This paper examines the economic rationale for the use of bank loan commitments and the effect on the allocation of bank credit of indexing the loan rate offered through the commitment to the prime. A simple model of the loan market is constructed and used to examine the effect changes in loan demand and the cost of bank funds have on the allocation of bank credit under indexation. It is shown that indexing implies changes in the relative cost of borrowing for certain groups of bank customers. For nonprime customers, an increase in the cost of bank funds results in a decline in the relative cost of borrowing under commitments. The pattern of commitment use is found to be consistent with the predictions of the model.     

Toward a theory of bank loan commitments

The characteristics of fixed and variable rate bank loan commitments are analyzed in a contingent-claims framework, and valuation expressions are derived for these commitments. The valuation expressions are used to present estimates of the impact of interest rate uncertainty on the liability assumed by a bank issuing loan commitments. Finally, a simple, two-period, asymmetric information model is employed to explain the recent trend among bankers to substitute variable rate commitments for their fixed rate counterparts.     

Competition,risk neutrality and loan commitments

We rationalize fixed rate loan commitments (forward credit contracting with options) in a competitive credit market with universal risk neutrality. Future interest rates are random, but there are no transactions costs. Borrowers finance projects with bank loans and choose ex post unobservable actions that affect project payoffs. Credit contract design by the bank is the outcome of a (non-cooperative) Nash game between the bank and the borrower. The initial formal analysis is basically in two steps. First, we show that the only spot credit market Nash equilibria that exist are inefficient in the sense that they result in welfare losses for borrowers due to the bank's informational handicap. Second, we show that loan commitments, because of their ability to weaken the link between the offering bank's expected profit and the loan interest rate, enable the complete elimination of informationally induced welfare losses and thus produce an outcome that strictly Pareto dominates any spot market equilibrium. Perhaps our most surprising result is that, if the borrower has some initial liquidity, it is better for the borrower to use it now to pay a commitment fee and buy a loan commitment that entitles it to borrow in the future rather than save it for use as inside equity in conjunction with spot borrowing.     

Liability and asset uncertainty for banks

Models of bank behavior are developed which incorporate both deposit and loan demand uncertainty. Extensions of the traditional and simple deposit uncertainty model involve the inclusion of required reserves, fixed penalty costs for reserve deficiencies, limits on normal borrowing, and uncertain spot loan demand and use of lines of credit. Results include normal borrowing limits as a new theoretical constraint on bank size and the existence of small fixed costs as a reason for the real world lack of deficient reserves. Policy conclusions include the effects of current reserve accounting and the effects of various interest rate changes.     

Valuing and hedging fixed rate mortgage commitments

A fixed rate loan commitment that is binding on the lender but not on the loan applicant is equivalent to a put option. This article uses the Black-Scholes option pricing model to establish a value for fixed rate loan commitments and to derive the hedge ratio for the lending institution to hedge the interest rate risk associated with the commitments in the FHLMC forward market for mortgages. The effectiveness of the resulting hedge is tested in a simulation, where it is found that the result is a 71% reduction in the variance of the value of the lender's gain or loss associated with the commitment period.     

ON THE CAPITAL STRUCTURE OF NON‐PROFIT ORGANISATIONS: A REPLICATION AND EXTENSION WITH BELGIAN DATA

The empirical tests of non‐profit organisations' capital structure theories by Jegers and Verschueren (2006) on a sample of Californian non‐profit organisations (data on 1999) are replicated and extended for a more recent Belgian sample (844 observations pertaining to 2007). Three complementary theories to explain the presence and levels of overall debt and financial debt are examined: equity constraints, agency, and borrowing constraints. The decision to borrow and the amount to be borrowed are analysed separately. The estimations obtained reveal that both are driven by different mechanisms. After having removed outliers, the results show effective equity constraints when explaining debt levels, as observed in the Californian sample with respect to the overall amount of debt. The results also indicate an agency explanation of debt: both the decision to borrow from financial institutions, and the overall amount of (financial) debt are positively affected by the presence of a potential agency gap between board and management. In the Californian sample, the results on this were mixed. Borrowing constraints were almost never discovered, similar to the conclusions reached by Jegers and Verschueren. However, slightly reducing the sample by removing outliers makes borrowing constraints apparent. As to the control variables, size positively affects the probability of borrowing, but, for the organisations taking on debt, negatively affects the level of borrowing. As could be expected, the amount of tangible fixed assets in place is positively related to the amount of financial debt.     

Pricing of Loan Commitments for Facilitating Stochastic Liquidity Needs

A bank loan commitment is often priced as a European-style put option that is used by a company with a known borrowing need on a known future date to lock in an interest rate. The literature has abstracted some of the important institutional features of a loan commitment contract. First, the timing, number, and size of the loan takedowns under such a contract are often random, rather than fixed. Second, companies often use loan commitment contracts to reduce the transaction costs of frequent borrowing and to serve as a guarantee for large and immediate random liquidity needs. Third, commercial banks maintain liquidity reserves for making random spot loans or random committed loans. Partial loan takedowns raise, rather than lower, the opportunity cost of a committed bank??s holding of excess capacity. This paper introduces a ??stochastic needs-based?? pricing model that incorporates these features. Simulations are conducted to illustrate the effects of various parameters on the fair price of a loan commitment.     

Venture capitalist value-added activities,fundraising and drawdowns

This paper is the first to introduce an analysis of the effect of different types of venture capitalist value-added activities (financial, administrative, marketing, strategic/management) on fundraising. In addition, we include an analysis of the functional difference between committed funds and drawdowns from capital commitments vis-à-vis pension funds and venture capital funds. The new comprehensive data, collected by the Australian Bureau of Statistics for 1999–2001, enable controls for venture capitalist performance, risk, investment activity, and management and performance fees. The results indicate that significantly more capital is allocated to venture capitalists that provide financial and strategic/management expertise to entrepreneurial firms (as opposed to marketing and administrative expertise). In addition, fundraising is greater among funds with higher returns and performance fees and lower fixed management fees. In contrast, drawdowns from capital commitments are greater among venture capital funds that provide financial and marketing expertise to investees (as opposed to strategic and administrative expertise), and among funds with higher performance fees and fixed management fees. Further, the results indicate an adverse impact on venture capital fundraising from illiquidity attributable to a 2-year lock-up period in IPO exits over the period considered.     

Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book Ratios

This paper presents a financial statement analysis that distinguishes leverage that arises in financing activities from leverage that arises in operations. The analysis yields two leveraging equations, one for borrowing to finance operations and one for borrowing in the course of operations. These leveraging equations describe how the two types of leverage affect book rates of return on equity. An empirical analysis shows that the financial statement analysis explains cross-sectional differences in current and future rates of return as well as price-to-book ratios, which are based on expected rates of return on equity. The paper therefore concludes that balance sheet line items for operating liabilities are priced differently than those dealing with financing liabilities. Accordingly, financial statement analysis that distinguishes the two types of liabilities informs on future profitability and aids in the evaluation of appropriate price-to-book ratios.     

Strategic judgment proofing

A liquidity‐constrained entrepreneur raises capital to finance a business activity that may harm bystanders. The entrepreneur raises senior (secured) debt to shield assets from the tort victims in bankruptcy. For a fixed level of borrowing, senior debt creates better incentives for precaution taking than either junior debt or outside equity. The entrepreneur's level of borrowing is, however, socially excessive. Giving tort victims priority over senior debtholders in bankruptcy prevents overleveraging but leads to suboptimal incentives. Lender liability exacerbates the incentive problem even further. A limited seniority rule dominates these alternatives. Shareholder liability, mandatory liability insurance, and punitive damages are also discussed.     

Loan commitments and the management of uncertain credit demand

We provide an explanation for loan commitments unrelated to borrower creditworthiness. In our model, banks can use loan commitments to reduce uncertainty regarding their own future funding needs. Given a cost advantage to banks that can acquire such information, there exists an equilibrium demand for commitments by riskneutral firms. The purchase of the loan commitment and the choice of contract terms reveals the buyer's private information regarding future credit needs. In order to ensure the sorting of the a priori indistinguishable applicants according to their private information, we show that a usage fee applied to the commitment holder's unused credit line is necessary.     

When bank loans are bad news: Evidence from market reactions to loan announcements under the risk of expropriation

In this paper we investigate whether inefficient bank loans can reduce the value of borrowing firms when expropriation of the stock of minority shareholders by controlling shareholders is a major concern. Using data from Chinese banks, we find that bank loan announcements generate significantly negative abnormal returns for the borrowing firms. In line with this expropriation view, negative stock price reactions following bank loan announcements are concentrated in firms that are perceived to be more vulnerable to expropriation by controlling shareholders. Finally, we find evidence that a negative relationship between market reactions and firm vulnerability to expropriation exists only when firms borrow from the least efficient banks.     

Discount window borrowing,monetary policy,and the post-October 6, 1979 federal reserve operating procedure

A demand schedule for discount window borrowing based on profit-maximizing bank behavior is derived. A feature of non-price rationing at the discount window making longer duration borrowing more costly is shown to make lagged borrowing and expected future spreads between the Federal funds rate and the discount rate relevant to the current borrowing decision. Consequently, both the size of the coefficients in the borrowing functions as well as the form of the function itself depend on expected Fed policy toward the spread. The demand function for discount window borrowing provides the critical link by which non-borrowed reserve control affects short-term interest rates and ultimately the money supply under post-October 6, 1979 reserve targeting. The analysis suggests some reasons why the Fed has experienced difficulty in specifying, estimating, and utilizing a discount window borrowing function in the non-borrowed reserve operating procedure.     

Exchange Rate Exposure,Foreign Currency Debt,and the Use of Derivatives: Evidence from Brazil

This paper studies the exchange rate exposure and its determinants for a sample of nonfinancial Brazilian companies from 1996 to 2006. The results indicate that the number of firms exposed to exchange rate fluctuations is higher in periods of crisis and under a fixed exchange rate regime. In addition, the results point out that, although companies' international activities, operational hedging, and financial policies are important determinants of firms' exposure, the changes in companies' exposure that took place when Brazil moved from a fixed to a floating exchange rate regime were mainly driven by changes in companies' foreign currency borrowing and the use of derivatives that occurred in that period.     

Firm age and the evolution of borrowing costs: Evidence from Japanese small firms

This paper investigates how firms’ borrowing costs evolve as they age. Using a new panel data set of about 100,000 bank-dependent small firms for 1997–2002 and focusing on the channel of “adaptation” (i.e., surviving firms’ borrowing costs decline as they age) and that of “selection” (i.e., total borrowing costs decline as defaulting firms exit), we find that the reputation hypothesis suggested by Diamond (1989) provides a more plausible explanation of the downward sloping age profile of borrowing costs than the firm dynamics (Cooley and Quadrini, 2001) or the relationship banking (Boot and Thakor, 1994) hypothesis. In addition, we examine whether the firm selection process in Japan has been natural or unnatural. Our findings suggest that it has been natural in that firms with lower quality are separated, face higher borrowing costs, and are eventually forced to exit, which contrasts with the results of previous studies on credit allocations in Japan, including Peek and Rosengren (2005). Further, we find that the evolution of borrowing costs is partially due to selection but is mainly attributable to adaptation.     

Credit line takedown and endogenous bank capital

This paper investigates the implications of the uncertain timing and usage of loan commitments for the optimal level of bank capital. We use trended Brownian motion to proxy the stochastic takedown of credit lines. Relying on “time to first passage” mathematics, we derive a probability density function for the time to depletion of the bank credit line as well as the likelihood for the time to exhausting the sources of liquidity that fund the loan takedown. Armed with these analytical results, we solve for the optimal level of bank capital within a simultaneous equation framework in order to capture the interrelationships of the endogenous variables. The optimality conditions produce a system of integral differential equations which refuse to yield reduced form solutions and provide no immediate intuition. Therefore, the maximizing values of the bank’s decision variables were simulated over a host of realistic scenarios. We document the comparative static behavior of the bank’s decision variables when equity is unencumbered by capital requirements and, also, examine the impact of the same parametric changes on bank behavior when equity is a fixed proportion of lending. Further simulations produce the expected time to liquidity depletion under different capital requirement schemes.     

家庭个体特征对居民借款行为的影响——来自中国家庭的经验证据

金融市场对于支持和鼓励家庭借款进而刺激家庭消费起着愈发重要的作用。作为家庭消费金融意识的重要体现,居民借款行为正在受到更多的关注。本文认为居民家庭借款行为包含两层含义:1.家庭是否有借款;2.家庭借款渠道的选择。利用CFPS调查项目中京沪粤三省市家庭借款行为的微观数据,本文运用Logit模型和Probit模型对影响居民家庭借款行为的家庭个体特征进行了实证分析,解析了不同家庭个体特征对借款行为的影响情况,并得出有关结论与启示。     

Endogenous Managerial Incentives and the Optimal Combination of Debt and Dividend Commitments

This paper studies the optimal combination of debt and dividend commitmentsin an agency model of the firm. Financial policy is relevant because ex-post information asymmetry requires managerial rewards to depend on the ability to meet financial commitments. If perquisite or inside information problems exist in isolation, debt-based incentives as assumed in previous studies result endogenously. If the problems exist simultaneously, dividends can be optimal even when they appear excessively costly as a signal and unduly lenient as a disciplining device. The reason is that the set of dynamically consistent rewards increases when debt commitments are augmented with dividend commitments, and a larger set of ex-post rewards is more valuable as ex-antedecisions become more complex.     

Modelling and Forecasting UK Public Finances

In this paper, we present a new model of UK public finances which aims to shed light on recent problems of forecasting the PSBR. The main elements of public spending are treated as endogenous variables which rise in line with GDP over the medium term. Also, the cyclical response of public borrowing to rises in the level of economic activity is more muted when growth is export-led than when it is consumer-led. These two features go a long way towards explaining the rapid deterioration of public finances in the early 1990s and the slow pace of improvement since 1993. JEL classification: C53, E62, H62.     

The market for borrowing corporate bonds

This paper describes the market for borrowing corporate bonds using a comprehensive data set from a major lender. The cost of borrowing corporate bonds is comparable to the cost of borrowing stock, between 10 and 20 basis points, and both have fallen over time. Factors that influence borrowing costs are loan size, percentage of inventory lent, rating, and borrower identity. There is no evidence that bond short sellers have private information. Bonds with Credit Default Swaps (CDS) contracts are more actively lent than those without. Finally, the 2007 Credit Crunch does not affect average borrowing costs or loan volume, but does increase borrowing cost variance.