A framework for assessing financial stability?

I worked as a consultant in the Financial Stability Department (FSD) of the Bank of England for several years (2002–2004). In this paper I reflect on issues relating to the work of such an FSD, starting with the difficulty of defining or measuring ‘financial stability’. Stress tests are commonly used, but, for an FSD, should relate to the system as a whole, not just to individual institutions. FSDs need to assess the probability, virulence and speed of occurrence of potential shocks. There is a need to develop appropriate analytical models. The focus on capital adequacy has diverted attention from concern about having sufficient liquidity.     

Managing organisational culture: insights from the hospitality industry

Despite the widespread criticism of the culture management approach by respected academics, recent surveys indicate that managers are continuing to engage in planned cultural interventions. Indeed, reports demonstrate that managing organisational culture is one of the most popular forms of managerial intervention, with one survey concluding that over 90 per cent of organisations engage in planned cultural change. This study describes and analyses organisational culture interventions in four companies within a single industry. It argues that the conceptualisation of organisational culture and culture change should be differentiated in ways that recognise the significance of contextual factors. It presents an analysis of interventions in the hospitality industry and delineates four insights from this sector that are pertinent to the theory and practice of managing cultural change.     

CONSISTENT ESTIMATION OF RESIDUAL VARIANCE IN REGULATORY EVENT STUDIES

This study presents new evidence on alternative methods used to test for abnormal returns in regulatory event studies where cross-sectional correlation in residuals is significant. Results contradict earlier studies that find no advantages to using joint generalized least squares (JGLS) methods over ordinary least squares (OLS). We find that in an actual regulatory event study cross-correlation is significant, and that failing to correct for this correlation results in substantially higher calculated F-statistics. In Monte Carlo simulations we find that OLS test statistics are not well specified when residuals exhibit cross-sectional correlation at levels that are reasonable to expect in daily return data, while JGLS test statistics are well specified. The study includes tests of the effective power of the OLS and JGLS statistics.     

MUTUAL FUND MORTALITY, 12B‐1 FEES,AND THE NET EXPENSE RATIO

The Securities and Exchange Commission is currently reviewing Rule 12b‐1, which governs how fund advisors may pay for the distribution of fund shares. We provide evidence that even after adjusting for economies of scale, funds with 12b‐1 fees have higher expense ratios net of the 12b‐1 fees than do funds without such fees. This finding suggests that 12b‐1 fees are more than just a deadweight cost. We also demonstrate that 12b‐1 fees are highest for funds that ultimately fail, that the proportion of funds with 12b‐1 fees is increasing over time, and that the level of those fees is also increasing over time.     

ECONOMIC GROWTH, CONVERGENCE CLUBS, AND THE ROLE OF FINANCIAL DEVELOPMENT

This paper aims to show and test the existence of a povertytrap linked to the development of the banking sector. Our theoreticalmodel exhibits multiple steady state equilibria due to a reciprocalexternality between the banking sector and the real sector.Growth in the real sector causes the financial market to expand,thereby increasing banking competition and efficiency. In return,the development of the banking sector raises the net yield onsavings and enhances capital accumulation and growth. The aimof our econometric tests is to check the existence of multiplesteady states associated with financial and educational development.     

State lotteries and externalities to their participants

The degree of participation in state lotteries can either increase or decrease expected returns. It is theoretically possible for unfair bets to become more than fair as participation in lotteries changes. In addition, the purchase of every combination of numbers can be more than a fair bet and such a purchase may increase the expected return to other lottery players.     

The assessment: contracts and competition

A significant recent development has been the extension of marketprocesses to activities which were previously provided by thepublic sector. A central feature of newly privatised marketsis the emergence of widespread forms of contracting. Explicitcontracting is used where in the past transactions had takenplace internally within a public enterprise of a governmentdepartment. The design of efficient forms of contracting hasbeen an essential component of the development of new marketsand quasi-markets such as those in defence and health. Thispaper examines evidence of the structure of contracts and theextent to which they contribute to or detract from the efficientoperation of markets, discusses the role of contracts in somenewly emerging markets, and evaluates contracts in utilitieswhere regulation rather than competition policy is widespread.     

GAINS TO BIDDER FIRMS IN CASH AND SECURITIES TRANSACTIONS

This paper presents empirical test results of alternative hypotheses regarding differences in returns to shareholders of bidding firms that choose different payment methods (cash or securities). The evidence is consistent with the payment method signaling hypothesis, which asserts that when management of the bidding firm believes its own stock to be overvalued (undervalued), securities (cash) will be the preferred payment method. The results are not consistent with either the overpayment hypothesis or the present value/hubris hypothesis. The findings also explain the conflicting results reported in prior work on gains to bidding firms.     

Derivative mortgage securities: An overview

Derivative mortgage securities have proliferated since planned amortization and floating rate CMO classes were introduced in late 1986. Other recently created derivative securities include reverse floaters and deep-discount bonds of CMOs, CMO residuals, and stripped and senior/subordinated passthroughs. These securities, which are derived from fixed-rate mortgages, were created to meet investor demands for maturity certainly, interest rate and prepayment hedging, and enhanced credit. The rapid growth of derivative securities reflects expansion of the investor base for fixed-rate mortgages. It also suggests that these mortgages will continue to be a viable housing finance instrument in a volatile interest rate environment. For the future, the increased creation of derivative securities will make the secondary mortgage market more efficient, facilitating the funding of fixed-rate mortgage originations.The substance of this paper was originally written in late 1987 and many of the specific data reflect that time period.