Conflict of Interest in Commercial Bank Equity Underwriting

This paper examines the pricing characteristics of initial public offerings underwritten by commercial banks. Assuming IPO underpricing is directly related to ex ante uncertainty, if the market rationally perceives these commercial banks to have a conflict of interest, these securities should have more underpricing than non-commercial bank underwritten initial public offerings (all else being equal). On the other hand, if the market believes that commercial bank involvement signals firm quality, less underpricing should be observed. This topic has recently gained in importance with the passage of the Financial Services Reform Act in November 1999. We find that the underpricing of commercial bank underwritten initial public offerings in which the firm had a previous banking relationship with the underwriter is significantly less than those underwritten by investment banks.     

Commercial banks in investment banking conflict of interest or certification role?

When commercial banks make loans to firms and also underwrite securities, does this hamper or enhance their role as certifiers of firm value? This paper examines empirically the pricing of bank-underwritten securities as compared to investment-house-underwritten securities over a unique period in the U.S. (pre-Glass-Steagall) when both banks and investment houses were allowed to underwrite securities. The evidence shows that investors were willing to pay higher prices for securities underwritten by banks rather than investment houses. The results support a certification role for banks, which is more valuable for junior and information sensitive securities.     

The Competitive Impact of Commercial Bank Underwriting on the Market for Municipal Revenue Bonds

This paper examines the impact of commercial bank entry in the market for municipal revenue bonds. We show that issues underwritten by commercial banks have lower underwriter spreads but not lower yields relative to issues underwritten by nonbank investment firms. In particular, this is more significant for non-investment-grade bonds underwritten by commercial banks. Our results are consistent with the interpretation that bank entry has resulted in increased competition in the municipal revenue bond market and that the lower yields observed for bank-underwritten commercial bonds may be due to banks having private information. Overall, our results suggest that policy changes leading to the relaxation of restrictive provisions concerning bank underwriting of municipal revenue bonds have had beneficial effects.     

Bank underwriting of debt securities: modern evidence

This article examines debt securities underwritten by Section20 subsidiaries of bank holding companies relative to thoseunderwritten by investment houses. Consistent with a net certificationeffect for banks, bank underwriting of lower credit rated firmsto whom the bank lends results in relatively higher prices (loweryields). We find no evidence of conflicts of interest even whenan issue is used to repay bank debt. Further, banks bring arelatively larger proportion of small issues to the market.Contrary to the contention that universal banking stunts availabilityof finance to small firms, bank underwritings appear to benefitsmall firms.     

Is universal banking justified? Evidence from bank underwriting of corporate bonds in Japan

We examine the extent to which universal banking in Japan creates conflicts of interest. We find that as banks enter the securities business, they discount the price of the corporate bonds they underwrite significantly in an effort to attract investors, thereby generating conflicts of interest that are harmful to issuers. Further, we find that close prior lending relationships between banks and their client issuers is the driving force behind such conflicts and that competition from investment houses limits but does not eliminate these conflicts. Our results contrast sharply with the evidence for the US, which largely shows a certification role for banks.     

Conflict of interest in commercial bank security underwritings: Canadian evidence

The recent repeal of the Glass–Steagall Act in the US has cleared the way for commercial banks to enter the securities underwriting business. Many of the concerns that resulted in the original passage of the Glass–Steagall Act, however, still exist. One of these is the possible conflict of interest a universal bank faces. This paper provides evidence on this issue from the experience of Canada following its removal of restrictions on chartered bank ownership of investment dealers. Both ex ante bond yield comparisons between commercial and investment bank underwritten issues and equity price reactions to bond issue announcements provide no evidence of a conflict of interest.     

日本利率市场化改革的路径及效应

文章回顾总结了日本利率市场化改革的经验与教训。在内外压力推动下,日本于1977年启动利率市场化改革,其改革进程历时17年,主要分为四个阶段,呈现谨慎渐进的特点。利率市场化后,利率对日本宏观经济的调节作用明显增强,货币和证券市场得到迅速发展,但银行间竞争加剧,在金融全面自由化的浪潮下,银行高风险经营导致资产泡沫的累积及其后大量倒闭事件的发生。     

The changing long-run linkage between yields on Treasury and municipal bonds and the 1986 Tax Act

The Tax Act of 1986 changed the tax treatment of tax-exempt municipal bonds for banks. Since banks were the dominant participant in the municipal bond market until 1986, some believe that this resulted in a breakdown of the long-run equilibrium relationship between municipal and US Treasury securities of equal maturity. We present evidence that there was a significant structural break in the relationship between municipal and Treasury bonds around the time of the Tax Act. This break is characterized by both a shift in the mean and a flattening of the slope parameter that links the two interest rates in a long-run equilibrium relationship.     

Understanding and managing interest rate risk at banks

Banks in many countries hold significant quantity of bonds issued by their sovereign. This nexus of bank balance sheets with the sovereign debt can amplify in a two-way loop the effect of a rise in sovereign debt yields on banks and vice-versa. The rise in sovereign debt yields tends to be episodic, exhibiting conditional volatility, and banks need to manage this risk proactively to dampen the two-way loop. Lessons are drawn from this perspective for understanding and managing of interest rate (or ‘duration’) risk at Indian banks from their holdings of government securities. Moral hazard implications of regulatory forbearance policies when the two-way loop materializes are also discussed.     

Requiem for a Market Maker: The Case of Drexel Burnham Lambert and Junk Bonds

This article adds to both the financial intermediation and market microstructure literature by examining the market reactions surrounding the withdrawal of a major financial intermediary and market maker from a specific securities market. We examine the exit of Drexel Burnham Lambert (Drexel) from the junk bond market in 1990. At the time Drexel exited the market by declaring bankruptcy, it was the dominant market maker and underwriter of junk bonds. We examine the impact of Drexel's failure on direct and indirect holders of junk bonds by investigating the effect of Drexel's collapse on junk bond returns, and on the stock returns of a group of firms that, on average, held significant amounts of junk bonds. We find that the collapse of Drexel had a significant impact on junk bond prices in general, and a greater impact on the prices of lower-quality junk bonds in particular. We interpret this result to imply that the value of the liquidity services supplied by Drexel was higher for lower-quality junk bonds. Additionally, we find that junk bonds underwritten by Drexel, as opposed to other investment banks, experienced a significant decline in price over the months leading up to Drexel's failure announcement. This suggests that the monitoring services provided by Drexel for the bonds it underwrote would not be replaced easily by other financial intermediaries operating in the junk bond market. Our results also indicate that the stock returns of life insurance companies with relatively high junk bond exposure tended to be affected more negatively by Drexel's financial distress than the stock returns of life insurance companies with relatively low junk bond exposure.     

Why do reputable agents work for safer firms?

Safer firms receive funding from reputable venture capitalists and offer new securities underwritten by reputable investment banks. We offer a new explanation for these facts employing a moral-hazard model in which a firm and an agent are matched endogenously. More reputable agent's effort has a greater impact on output. Safer firm's output reflects the agent's hidden effort more accurately and therefore the agent's pay scheme tied with the output powerfully motivates her to exert effort. In equilibrium, a safer firm should be matched with a reputable agent since this combination allows to maximize effort of the reputable agent.     

Tainted portfolios: How impairment accounting rules restrict security sales

Contrary to claims that fair value accounting exacerbated banks’ securities sales during the recent financial crisis, we present evidence that suggests – if anything – that the current impairment accounting rules served as a deterrent to selling. Specifically, because banks must provide evidence of their ‘intent and ability’ to hold securities with unrealized losses, there are strong incentives to reduce, rather than increase, security sales when market values decline to avoid ‘tainting’ their remaining securities portfolio. Validating this concern, we find that banks incur greater other‐than‐temporary impairment (OTTI) charges when they sell more securities. We then find that banks sell fewer securities when their security portfolios have larger unrealized losses (and thus larger potential impairment charges), and these results are concentrated in banks with homogenous securities portfolios, expert auditors, more experienced managers, and greater regulatory capital slack. Overall, our results suggest that – contrary to critics’ claims – the accounting rules appear to have reduced banks’ propensity to sell their securities during the financial crisis.     

量化宽松货币政策的理论、实践与影响

全球金融危机已使全球经济陷入衰退,为应对危机各国央行不断降息。随着短期利率接近于零,美、日、英等主要国家的央行转而求助于"量化宽松货币政策",即通过购买长期国债等方式向经济注入巨量的流动性。全球大规模采取量化宽松政策在历史上尚属首次,对世界经济和中国经济都将产生难以估量的影响,对此有必要进行深入的分析。为此,本文在对量化宽松货币政策的理论基础进行分析的基础上,进一步研究了日本量化宽松政策实践的经验与教训及其影响,并提出相应的政策建议。     

The rise of China's securitization market

We study the development of asset securitization markets in China. We manually collect all asset securitization projects and securities data from 2005 to 2015. Inspection of this sample combined with related policy changes reveals distinct characteristics and some potential problems. At the macro level, asset securitization market in China is policy driven, regulation‐segmented, and highly illiquid. At the micro level, the underlying assets are mainly corporate loans or assets, rather than mortgage or consumption loans as in the US and European markets. State owned commercial banks and enterprises enjoy significantly lower interest rates when issuing securitization bonds. Finally, risk‐isolation and credit enhancing techniques significantly improve the rating of asset‐backed securities.     

A Comparison of Underwriting Costs of Initial Public Offerings by Investment and Commercial Banks

We examine differences in underwriting costs between commercial‐bank‐Section‐20‐underwritten initial public offerings (IPOs) and investment‐bank‐underwritten IPOs. Our results suggest that total underwriting costs (gross margin plus underpricing) are significantly lower for commercial bank IPOs. The lower cost for commercial bank IPOs is attributable to less severe underpricing for these issues. Gross margin costs generally do not differ between commercial bank and investment bank issues. Furthermore, we find that the long‐run stock price performance for commercial bank issues is superior to that of investment bank issues. That is, lower underpricing for Section 20 issues may not be a short‐run phenomenon. Rather, there appears to be a favorable outcome for investors in the long run for holding IPOs underwritten by Section 20 commercial banks. These results are inconsistent with the conflict of interest hypothesis often associated with merging commercial and investment bank functions in one organization.     

Banks' noninterest income and securities holdings in a low interest rate environment: The case of Italy

Using a sample of 440 Italian banks over the period 2007–2016, we find that low interest rates motivate banks to expand their fee and commission income and to restructure their securities portfolios. A granular breakdown suggests that banks grow noninterest income in various ways, including portfolio management, brokerage and consultancy services and increase fee income from current account and payment services. In addition, banks rebalance securities portfolios away from those “held for trading” to securities “available for sale” and “held to maturity.” Our findings allude to different behavior between large and small banks: while larger banks increase brokerage, consultancy and portfolio management services, smaller banks generate fees from customer current accounts.     

Contained crisis and socialized risk: Unconventional monetary policy by the Bank of Japan in the 1890s

In the 1880s, Japan experienced its first stock investment boom, which was highly leveraged by the banking sector. In 1890, its first financial crisis occurred and triggered a de-leveraging process. With a high lower bound of the conventional interest rate intervention under the fixed exchange rate regime, the Bank of Japan decided to implement a massive securities purchases first time among major industrial economies and continued this unconventional policy until the early 1900s. We examine how the unconventional intervention for a decade affected the stock prices and the trade volumes, and show that the upward distortion in market pricing was considerable and that the equity-risk premium accordingly dropped, which meant socialization of the risk associated with the industrial investment.     

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.     

The impact of securitization on credit rationing: Empirical evidence

We study whether banks’ involvement into different types of securitization activity – asset backed securities (ABS) and covered bonds – in Spain influences credit supply before and during the financial crisis. While both ABS and covered bonds were hit by the crisis, the former were hit more severely. Employing a disequilibrium model to identify credit rationing, we find that firms with banks that were more involved in securitization see their credit constraints more relaxed in normal periods. In contrast, only greater covered bonds issuance reduces credit rationing during crisis periods whereas ABS aggravates these firms’ credit rationing in crisis periods. Our results are in line with the theoretical predictions that a securitization instrument that retains risk (covered bond) may induce a more prudent risk behavior of banks than an instrument that provides risk transferring (ABS).     

Conflict of interest and certification in the U.S. IPO market

We examine the long-term return performance of U.S. IPOs underwritten by relationship banks. We show that, over one- to three-year horizons, IPOs managed by relationship banks experience buy-and-hold benchmark-adjusted returns that are similar to those observed for a matching sample of stocks managed by non-relationship underwriters. This result holds even when the returns' skewness and cross-sectional correlation is accounted for. Further, we examine the calendar-time returns on a portfolio that is long the stocks underwritten by relationship banks and short ex-ante similar stocks taken public by non-relationship institutions. Again, we conclude that the two groups of IPOs yield similar long-run returns. These findings support the certification role of relationship banks and suggest that, in this respect, the effect of the 1999 repeal of Sections 20 and 32 of the Glass–Steagall Act has not been negative.