Market discipline in the Brazilian banking industry: an analysis for the subordinated debt holders

Market discipline is a regulatory mechanism which has as its main task the punishment of bad risk management by financial institutions. Subordinated debt holders are considered by the literature as the most propitious private agent to discipline the financial institutions. The key to prove the existence of market discipline is to show the relationship between banks’ asset prices and its respective risks. The main objective of this article is an empirical analysis of the relation between credit risk (ratings and accounting information) and debentures return for the Brazilian case. The results denote a weak presence of market discipline in Brazil.     

Government risk premiums in the bond market: EMU and Canada

This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada, using data for bond yield spreads for the period 1991–2005. We find that risk premiums by central governments respond positively to debt and deficits; German states enjoyed a favourable position in financial markets before EMU but not thereafter; Spanish and Canadian provinces risk premiums over the whole period; German and Spanish sub-central governments pay liquidity-related interest rate premiums; Canadian and German provinces/states that benefit from fiscal equalization lower spreads. This is evidence of market discipline at work and of credibility of the EU no-bailout clause.     

Sovereign default risk premia,fiscal limits,and fiscal policy

We develop a closed economy model to study the interactions among sovereign risk premia, fiscal limits, and fiscal policy. The fiscal limits, which measure the government's ability to service its debt, arise endogenously from dynamic Laffer curves. The state-dependent distributions of fiscal limits depend on the growth of lump-sum transfers, the size of the government, the degree of countercyclical policy responses, and economic diversity. The country-specific fiscal limits imply that the market perceives the riskiness of sovereign debt issued by different countries to be different, which is consistent with the observation that developed countries are downgraded at different levels of debt. A nonlinear relationship between sovereign risk premia and the level of government debt emerges in equilibrium, which is in line with the empirical evidence that once risk premia begin to rise, they do so rapidly. Nonlinear simulations show that fiscal austerity measures that aim to balance the government budget in the short run fail to contain the default risk premium, even with sizeable cuts in government purchases; but a long-term plan for fiscal reform, if it credibly changes the market's expectation about future fiscal policies, can alleviate the rising risk premium.     

Foreign currency debt, risk premia and macroeconomic volatility

This paper studies the relationships between foreign currency debt, macroeconomic volatility, and risk premia in a model of a small open emerging market economy. The external value of the local currency is counter-cyclical, so that foreign currency debt requires larger repayments than local currency debt in bad states of nature. The level of foreign currency-denominated debts, therefore, affects the volatility of aggregate demand and by extension of the exchange rate. Exchange rate volatility is in turn an important determinant of the risk premium on local currency debt. Finally, this risk premium is a major factor in the choice of local versus foreign currency for emerging market borrowers. The mutual endogeneity of foreign currency debt, risk premia, and macroeconomic volatility creates important feedback effects in the economy: small increases in international risk aversion may entail large amplification effects on macroeconomic volatility since domestic borrowers substitute towards cheaper but riskier foreign currency debt finance.     

The relationship between risk-neutral and actual default probabilities: the credit risk premium

The study investigates empirically the relationship between the risk-neutral measure Q and the real-world measure P. We study the ratio between the risk-neutral and actual default intensities, which we call the coverage ratio or the relative credit risk premium. Actual default intensities are derived from rating agencies annual transition matrices, while risk-neutral default intensities are bootstrapped from CDS quotes of European corporates. We quantify the average risk premium and its changes over time. Compared to related literature, special attention is given to the effects of the recent financial and European sovereign crises. We find that average credit risk premia rose substantially and that post-crisis levels are still higher than those observed before the financial crisis. This observation is especially true for high-quality debt and if it persists, it will have an impact on corporates funding costs. The quantification and revision of risk premia contributes to the discussion of the credit spread puzzle and could give extra insights in valuation models that start from real-world estimates. Our work is furthermore important in the context of state aid assessment. The real economic value (REV) methodology, applied by the European Commission to evaluate impaired portfolios, is based on a long-term average risk premium.     

Firm credit risk in normal times and during the crisis: are banks less risky?

Bank solvency was a major issue during the financial crisis of 2007–2009, but bank credit default swap (CDS) spreads were almost always below nonbank CDS spreads. What is the reason for this gap? Are banks perceived to be less risky? This study empirically decomposes CDS premia for 45 major banks and 167 large industrial firms from Europe and the US. It turns out that expected losses are usually somewhat lower for banks than for nonbanks, but expected losses contribute relatively little to the observed CDS premia. CDS spreads for banks and nonbanks differ mainly because market participants require a lower compensation for bearing bank credit risk. The quite persistent difference in the credit risk premia for banks and nonbanks disappears only temporarily during the crisis.     

Credit card debt and consumption: evidence from household-level data

This research investigates the relationship between credit card debt and consumption using household level data. This is a departure from the previous studies which have used aggregate measures of consumption and general debt such as the Debt Service Ratio or total revolving credit. We use a detailed monthly survey of credit card use to impute credit card debt to respondents from the Consumer Expenditure Survey sample. In contrast to some earlier studies using aggregate data, we find a negative relationship between debt and consumption growth. Our work shows that a $1000 increase in credit card debt results in a decrease in quarterly consumption growth of almost 2%. Investigations are also made into effects of debt within different age categories and into the impact of expected income growth on the debt–consumption relationship.     

SHOULD A MANDATORY SUBORDINATED DEBT POLICY BE INTRODUCED IN THE UNITED KINGDOM? EVIDENCE FROM THE ISSUANCE ACTIVITY OF BANKS AND BUILDING SOCIETIES

Current research is beginning to question the role and effectiveness of traditional rules‐based bank regulatory oversight in favor of incentive‐compatible regulatory design and market discipline and, in particular, mandatory subordinated debt market discipline. However, research on the suitability of a mandatory subordinated debt policy (MSNDP) has focused primarily on the United States. The primary aims of this article, therefore, are to examine the market for subordinated debt (SND) issued by UK credit institutions and to assess the suitability of introducing an MSNDP into UK banking regulation. A further contribution of this article is that it explores SND issuance and its characteristics at a bank level and, uniquely, considers them in relation to regulatory, structural, and economic events that either are specific to the UK or otherwise affect international banks. The article compares the UK findings with research on SND markets in the United States and Europe and, in so doing, raises concerns over whether an MSNDP for the largest global credit institutions would be feasible. Although the focus of this study is the UK banking industry, the country‐focused bank‐level approach provides conclusions that might be relevant to other countries considering the implementation of an MSNDP.(JEL G18, G28)     

Securitization of mortgage debt,domestic lending,and international risk sharing

Abstract Securitization makes mortgage‐related risks internationally tradeable and thus contributes considerably to the international diversification of macroeconomic risk: in the years 2003–2008, the increase in international cross‐holdings of securitized mortgage debt has lowered industrialized countries’ conditional consumption volatility (relative to the United States) by about 10–15 percentage points. We turn to the role of domestic credit in explaining this result. Domestic credit leads to better international risk sharing only if debt is securitized and traded internationally. Conversely, the risk‐sharing benefits from securitization seem to evaporate if credit dries up – as it did in the recent financial crisis.     

The pricing of bonds and bank loans in international markets: An empirical analysis of developing countries' foreign borrowing

Most recent empirical studies on creditworthiness and country risk have dealt with the international bank loan market, and have ignored the bond market in their effort to analyze the process of determination of default risk premia. In this paper data on both bank loans to the LDCs and on bonds issued by LDCs are used to analyze empirically several aspects related to developing countries' foreign borrowing and country risk. The paper analyzes three basic problems. First, some of the more important implications of modern models of LDCs foreign borrowing are tested. In particular the supposed positive effect of the level of indebtedness on the risk premium is investigated. Second, the pricing of bonds and bank loans are explicitly compared, in order to test whether, as sometimes has been argued, these two markets are significantly different. And third, data on yields on LDC bonds in the secondary market are analyzed to investigate the extent to which the market anticipated the debt crisis, and how it reacted to it.The main results obtained can be summarized as follows: First, both the bank loans and bonds data confirm some of the more important implications of foreign borrowing models. Specifically, the positive effect of higher debt ratios on the risk premium is confirmed. Second, it is found that the pricing of bonds and bank loans has somewhat differed. And third, it is found that the market anticipated by only a few weeks — and only partially — the world debt crisis of 1982. Finally, some policy implications that emerge from these findings are discussed.     

次级债对商业银行利益相关人影响的数理分析——基于市场约束的视角

次级债权及存款债权对商业银行有市场约束作用,并且存款债权的市场约束不受次级债的发行而改变。但是次级债的发行一定程度上对存款债权构成了风险补偿。商业银行股东则没有发挥市场约束作用而且不受次级债发行的影响。因此应促进发挥次级债的市场约束作用,并且注意选择次级债的发行时机。     

The Interactions between the Credit Default Swap and the Bond Markets in Financial Turmoil

We analyse the links between credit default swap (CDS) and bond spreads in order to determine which one is the leading market in the price discovery process. To do that, we construct a sample of CDS premia and bond spreads on a generic 5‐year bond for 17 financials and 18 sovereigns. First, we run panel vector error correction model estimations, showing that the CDS market has a lead over the bond market for financial institutions. This also holds for high‐yield sovereigns, whereas the reverse is found for low‐yield sovereigns in the core of the euro area. We interpret these results according to the relative liquidity of both markets for different types of entities. Second, we check for nonlinearities in the adjustment process. Results show that the CDS market's lead is amplified when default risk increases, during crisis periods, as well as continuously when CDS premia increase.     

Diverse beliefs and time variability of risk premia

Why do risk premia vary over time? We examine this problem theoretically and empirically by studying the effect of market belief on risk premia. Individual belief is taken as a fundamental primitive state variable. Market belief is observable; it is central to the empirical evaluation and we show how to measure it. Our asset pricing model is familiar from the noisy REE literature but we adapt it to an economy with diverse beliefs. We derive equilibrium asset prices and implied risk premium. Our approach permits a closed form solution of prices; hence we trace the exact effect of market belief on the time variability of asset prices and risk premia. We test empirically the theoretical conclusions. Our main result is that, above the effect of business cycles on risk premia, fluctuations in market belief have significant independent effect on the time variability of risk premia. We study the premia on long positions in Federal Funds Futures, 3- and 6-month Treasury Bills (T-Bills). The annual mean risk premium on holding such assets for 1?C12?months is about 40?C60 basis points and we find that, on average, the component of market belief in the risk premium exceeds 50% of the mean. Since time variability of market belief is large, this component frequently exceeds 50% of the mean premium. This component is larger the shorter is the holding period of an asset and it dominates the premium for very short holding returns of less than 2?months. As to the structure of the premium we show that when the market holds abnormally favorable belief about the future payoff of an asset the market views the long position as less risky hence the risk premium on that asset declines. More generally, periods of market optimism (i.e. ??bull?? markets) are shown to be periods when the market risk premium is low while in periods of pessimism (i.e. ??bear?? markets) the market??s risk premium is high. Fluctuations in risk premia are thus inversely related to the degree of market optimism about future prospects of asset payoffs. This effect is strong and economically very significant.     

商业银行信贷配给对中国房地产业波动的影响*

商业银行信贷配给控制中国房地产业信贷规模和结构,造成供给和需求的规模与结构扭曲,影响货币政策和财政政策的调控效果,容易引起房地产业波动。本文通过构建信贷配给模型,测算不同波动时期当中,商业银行信贷配给程度的变化趋势,以及对房地产业的影响。实证结果显示,信贷配给程度的变化与房地产业波动显著相关,信贷配给改变了投资和消费在推动房地产产出过程中的结构,并制约路径依赖对产出的影响,同时影响财政政策和数量型货币政策稳定房地产业的效果。本文认为,可以通过逐渐弱化商业银行在房地产金融市场中的垄断地位,丰富房地产信贷供给层次和结构,以及加强信贷供给监督来缓解信贷配给的消极作用。     

The perils of debt deflation in the Euro area: a multi regime model

Academic research and policy makers in the Euro area are currently concerned with the threat of debt deflation and secular stagnation in Europe. Empirical evidence seems to suggest that secular stagnation and debt deflation in the Euro area may be rather slowly developing. Yet what appears as major peril is that debt deflation with a lack of economic growth, rising real interest rates and further rising debt may trigger household defaults, defaults of firms and banks, rise of risk premia, and default risk of certain sectors of the economy or sovereign defaults. It is this rising default and financial risk that may lead to a regime change to a slowly moving debt crisis with high financial risk and high financial stress. In order to explore those issues, a macro policy model of Svensson type is introduced, exhibiting a regime of low and high financial stress. Then, a four dimensional multi-regime VAR is employed to an Euro area data set to support the theoretical model and the claim that in particular Southern Euro area countries are affected by debt deflation and financial market stress.     

商业信用融资对企业研发投入强度的影响

研发活动的高风险特征决定其必然受到融资约束。商业信用作为企业短期融资方式,是否影响研发投入？以我国2009-2016年创业板上市公司为样本,探讨商业信用融资对研发投入的影响及产权性质在其中的作用。实证研究发现：企业获得的商业信用越多,越不利于提高研发投入强度。商业信用带来的短期偿债压力会抑制企业研发投入;商业信用融资对民营企业研发投入强度的抑制作用更加明显。结论表明,商业信用融资对企业研发投入主要表现为偿债压力带来的风险效应,而不是融资支持,对民营企业的风险效应更为显著。在金融市场不完善情况下,短期融资难以支持企业长期投资,因而政府需要通过完善金融市场、缓解民营企业融资约束,降低短期负债偿债压力对企业研发活动带来的不利影响。     

Insolvency regimes and firms' default risk under economic uncertainty and shocks

One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations.     

Optimal personal bankruptcy design under moral hazard

In this paper, we develop a normative theory of unsecured consumer credit and personal bankruptcy based on the optimal trade-off between incentives and insurance. First, in order to characterize this trade-off, we solve a dynamic moral hazard problem in which agents' private effort decisions influence the life-cycle profiles of their earnings. We then show how the optimal allocation of individual effort and consumption can be implemented in a market equilibrium in which (i) agents and intermediaries repeatedly trade secured and unsecured debt instruments, and (ii) agents obtain (restricted) discharge of their unsecured debts in bankruptcy. The structure of this equilibrium and the associated restrictions on debt discharge closely match the main qualitative features of personal credit markets and bankruptcy law that actually exist in the United States.     

Credible commitments and constitutional constraints: state debt repudiation and default in nineteenth century America

Between 1839 and 1842 the United States suffered through an acute debt crisis. Over this period, eight states and one territory defaulted, five of which outright repudiated all or parts of their outstanding debts. However, for many of those same states, reentry into capital markets occurred relatively rapidly and at rather favorable terms. The question then arises, how and why was this possible? This work attempts to explain this phenomenon by suggesting that soon after default or repudiation many states enacted constitutional amendments meant to significantly constrain and credibly commit future governments from overextending credit and simultaneously to pursue time-consistent public policy. I explore this by examining the impact that these newly imposed constitutional amendments, which limited both the type and amount of debt and created stronger procedural safeguards for issuing debt, had on average bond prices, gathered from New York market data. Overall, my results show that newly constrained states had higher average bond prices than states that did not impose constitutional limits on debt financing, suggesting that markets did, in fact, perceive these constitutional changes to be binding and credible.     

Taxation, agency conflicts, and the choice between callable and convertible debt

We analyze debt choice in light of taxes and moral hazard. The model features an infinite sequence of nonzero-sum stochastic differential games between equity and debt. Closed-form expressions are derived for all contingent-claims. If equity can increase volatility without reducing asset drift, callable bonds with call premia are optimal. Although callable bonds induce risk shifting, call premia precommit equity to less frequent restructuring and are tax-advantaged. Convertible bonds mitigate risk shifting, but only induce hedging if assets are far from the default threshold. Convertibles are optimal only if risk shifting reduces asset drift sufficiently.