Search results
1 – 10 of over 13000Arun Kumar Misra, Molla Ramizur Rahman and Aviral Kumar Tiwari
This paper has used account-level data of corporate and retail borrowers, assessed their credit risk through the risk-neutral principle and examined its implication on loan pricing…
Abstract
Purpose
This paper has used account-level data of corporate and retail borrowers, assessed their credit risk through the risk-neutral principle and examined its implication on loan pricing.
Design/methodology/approach
It derives the capital charge and credit risk-premium for expected and unexpected losses through a risk-neutral approach. It estimates the risk-adjusted return on capital as the pricing principle for loans. Using GMM regression, the article has assessed the determinants of risk-based pricing.
Findings
It has been found that risk-premium is not reflected in the current loan pricing policy as per Basel II norms. However, the GMM estimation on RAROC can price risk premium and probability of default, LGD, risk weight, bank beta and capital adequacy, which are the prime determinants of loan pricing. The average RAROC for retail loans is more than that of corporate loans despite the same level of risk capital requirement for both categories of loans. The robustness tests indicate that the RAROC method of loan pricing and its determinants are consistent against the time and type of borrowers.
Research limitations/implications
The RAROC method of pricing effectively assesses the inherent risk associated with loans. Though the empirical findings are confined to the sample bank, the model can be used for any bank implementing the Basel principle of risk and capital assessments.
Practical implications
The article has developed and validated the model for estimating RAROC, as per Basel II guidelines, for loan pricing that any bank can use.
Social implications
It has developed the risk-based loan pricing model for retail and corporate borrowers. It has significant practical utility for banks to manage their risk, reduce their losses and productively utilise the public deposits for societal developments.
Originality/value
The article empirically validated the risk-neutral pricing principle using a unique 1,520 retail and corporate borrowers dataset.
Details
Keywords
Tosporn Chotigeat, Maretno A. Harjoto and Ha‐Chin Yi
This study examines bank practices of corporate loan pricing in the Asia‐Pacific region. We find that the all‐in‐spread for loans (mostly term loans with longer maturities) in the…
Abstract
This study examines bank practices of corporate loan pricing in the Asia‐Pacific region. We find that the all‐in‐spread for loans (mostly term loans with longer maturities) in the Asia‐Pacific region are significantly smaller than those in the US. In addition, foreign banks tend to price their loans favorably in the Asia‐Pacific region, while foreign banks in the US have a higher loan spread. This finding indicates that foreign banks foster more competitive loan pricing in the Asia‐Pacific region, while foreign banks in the US seem to experience a competitive disadvantage compared to domestic lenders.
Details
Keywords
Galina Hale and João A.C. Santos
This paper aims to analyze how banks transmit shocks that hit the debt market to their borrowers. Recent financial crisis demonstrated that the banking system can be a pathway for…
Abstract
Purpose
This paper aims to analyze how banks transmit shocks that hit the debt market to their borrowers. Recent financial crisis demonstrated that the banking system can be a pathway for shock transmission.
Design/methodology/approach
Bank-level panel regressions.
Findings
This paper shows that when banks experience a shock to the cost of their bond financing, they pass a portion of their extra costs or savings to their corporate borrowers. While banks do not offer special protection from bond market shocks to their relationship borrowers, they also do not treat all of them equally. Relationship borrowers that are not bank-dependent are the least exposed to bond market shocks via their bank loans. In contrast, banks pass the highest portion of the increase in their cost of bond financing to their relationship borrowers that rely exclusively on banks for external funding.
Research limitations/implications
These findings show that banks put more weight on the informational advantage they have over their relationship borrowers than on the prospects of future business with these borrowers. They also show a potential side effect of the recent proposals to require banks to use CoCos or other long-term funding.
Originality/value
The findings are timely, given the ongoing debates on the proposals to introduce bail-in programs and proposals to require banks to use CoCos or other long-term funding.
Details
Keywords
This paper aims to investigate whether the Section 404 of Sarbanes–Oxley Act (SOX 404) changed the way banks use accounting information to price corporate loans.
Abstract
Purpose
This paper aims to investigate whether the Section 404 of Sarbanes–Oxley Act (SOX 404) changed the way banks use accounting information to price corporate loans.
Design/methodology/approach
The study uses a sample of 1,173 US-listed firms that issued syndicated loans both before and after their compliance with SOX 404 to analyze the changes in loan spread’s sensitivity to some key accounting metrics such as ROA, interest coverage, leverage and net worth.
Findings
The study finds that the interest spread’s sensitivity to key accounting metrics, most noticeably for ROA, declined following the borrower’s compliance with the requirements of SOX 404. The decline was not explainable by borrowers that disclosed internal control weaknesses but concentrated among borrowers suspected of real earnings management (REM).
Originality/value
By examining the effects of SOX 404 on banks’ pricing process, this study augments the literature on SOX’s economic consequences. The findings suggest that lenders perceive little new information from SOX 404 disclosures of internal control deficiencies and are cautious about the accounting information provided by REM borrowers. It also extends the research on the use of accounting information in debt contracting. By examining loan interest’s sensitivity to accounting metrics, it broadens the concept of debt contracting value of accounting information to include accounting’s usefulness for assessing credit risk at loan inception.
Details
Keywords
Prior research suggests that given the legal environment in the U.S., smaller syndicates with fewer lead banks should represent “best practices” to promote efficient monitoring…
Abstract
Prior research suggests that given the legal environment in the U.S., smaller syndicates with fewer lead banks should represent “best practices” to promote efficient monitoring and ease of renegotiation. Such syndicates should be associated with lower loan spreads. Controlling for other influences on loan pricing, we conduct tests of this proposition drawing on data from DealScan, Compustat and Federal Reserve Call Reports for U.S. loans between 1988 and 1999. Consistent with our hypothesis, the number of lead lenders is shown to have a significant positive influence on loan yield spreads.
Jianfang Zhou, Jingjing Wang and Jianping Ding
After loan interest rate upper limit deregulation in October 2004, the financing environment in China changed dramatically, and the banks were eligible for risk compensation. The…
Abstract
Purpose
After loan interest rate upper limit deregulation in October 2004, the financing environment in China changed dramatically, and the banks were eligible for risk compensation. The purpose of this paper is to focus on the influence of the loan interest rate liberalization on firms’ loan maturity structure.
Design/methodology/approach
Based on Rajan's (1992) model, the authors constructed a trade-off model of how the banks choose long-term and short-term loans scales, and further analyzed banks’ loan term decisions under the loan interest rate upper limit deregulation or collateral cases. Then the authors used an unbalanced panel data set of 586 Chinese listed manufacturing companies and 9,376 observations during the period 1996-2011 to testify the theoretical conclusion. Furthermore, the authors studied the effect on firms with different characteristics of ownership or scale.
Findings
The results show that the loan interest rate liberalization significantly decreases the private companies’ reliance on short-term loans and increases sensitivity to interest rates of state-owned companies’ long-term loans. But the results also show that the companies’ ownership still plays a key role on the long-term loans availability. When monetary policy tightened, small companies still have to borrow short-term loans for long-term purposes. As the bank industry is still dominated by state-owned banks and the deposit interest rate has upper limits, the effect of the loan interest rate liberalization on easing long-term credit constraints is limited.
Originality/value
From a new perspective, the content and findings of this paper contribute to the study of the effect of the interest rate liberalization on China economy.
Details
Keywords
Alper Kara, Aydin Ozkan and Yener Altunbas
Bank securitisation is deemed to have been a major contributing factor to the 2007/2008 financial crises via fuelling credit growth accompanied by lower banks’ credit standards…
Abstract
Purpose
Bank securitisation is deemed to have been a major contributing factor to the 2007/2008 financial crises via fuelling credit growth accompanied by lower banks’ credit standards. Yet, prior to the crisis a common view was that securitisation activity makes the financial system more stable as risk was more easily diversified, managed and allocated economy-wide. The purpose of this paper is to review the extant literature to explore the so far generated knowledge on the impact of securitisation on banking risks. In particular, the authors examine the theoretical arguments and empirical studies on securitisation and banking risks before and after the global financial crisis of 2007/2008.
Design/methodology/approach
Review and discussion of the literature.
Findings
Theoretical literature univocally accentuate the undesirable consequences of securitisation, which may promote retention of riskier loans, undermine banks’ screening and monitoring incentives and enhance banks’ risk appetite. However, empirical evidence does not uniformly support the theoretical conclusions. If banks are securitisation active they lend more to risky borrowers, have less diversified portfolios and hold less capital, retain riskier loans and are aggressive in loan pricing. Others argue that securitisation reduces banks insolvency risk, increases profitability, provides liquidity and leads to greater supply of loans. Mortgage securitisation is an area where there is consistent evidence of bank risk taking via securitisation.
Originality/value
The paper identifies open issues for future research.
Details
Keywords
– The purpose of this paper is to provide a cohesive review of the major findings in the literature concerning the Global Financial Crisis.
Abstract
Purpose
The purpose of this paper is to provide a cohesive review of the major findings in the literature concerning the Global Financial Crisis.
Design/methodology/approach
Papers published in top-rated finance and economics journal since the crisis up to the present were reviewed. A large number of these were selected for inclusion, primarily based on the number of citations they had received adjusted for the amount of time elapsed since their publication, but also partly based on how well they fit in with the narrative.
Findings
Much has been done to investigate the causes of the Global Financial Crisis, its effects on various aspects of the financial system, and the effectiveness of regulatory measures undertaken to restore the financial system. While more remains to be done, the existing body of research paints an interesting picture of what happened and why it happened, describes the interrelationships between the mortgage markets and financial markets created by the large scale securitization of financial assets, identifies the problems created by these inter-linkages and offers possible solutions, and assesses the effectiveness of the regulatory response to the crisis.
Originality/value
This study summarizes a vast amount of literature using a framework that allows the reader to quickly absorb a large amount of information as well as identify specific works that they may wish to examine more closely. By providing a picture of what has been done, it may also assist the reader in identifying areas that should be the subject of future research.
Details
Keywords
Simplice Asongu and Jacinta Nwachukwu
The purpose of this paper is to investigate how bank size affects the role of information asymmetry on financial access in a panel of 162 banks in 39 African countries for the…
Abstract
Purpose
The purpose of this paper is to investigate how bank size affects the role of information asymmetry on financial access in a panel of 162 banks in 39 African countries for the period 2001-2011.
Design/methodology/approach
The empirical evidence is based on instrumental variable fixed effects regressions with overlapping and non-overlapping bank size thresholds to control for the quiet life hypothesis (QLH). The QLH postulates that managers of large banks will use their privileges for private gains at the expense of making financial services more accessible to the general public. Financial access is measured with loan price and loan quantity whereas information asymmetry is implicit in the activities of public credit registries and private credit bureaus.
Findings
The findings with non-overlapping thresholds are broadly consistent with those that are conditional on overlapping thresholds. First, public credit registries have a decreasing effect on the price of loans with the magnitude of reduction comparable across all bank size thresholds. Second, both public credit registries and private credit bureaus enhance the quantity of loans. Third, compared with public credit registries, private credit bureaus have a greater influence in increasing financial access because they have a significantly higher favorable effect on the quantity and price of loans Fourth, the QLH is not apparent because large banks are not associated with lower levels of financial access compared to small banks.
Originality/value
Studies of public credit registries and private credit bureaus in Africa are sparse. This is one of the few to assess linkages between bank size, information asymmetry and financial access.
Details
Keywords
Celia Álvarez-Botas and Víctor M. González-Méndez
The purpose of this paper is to analyse the effect of economic development on the influence of country-level determinants on corporate debt maturity, bearing in mind firm size and…
Abstract
Purpose
The purpose of this paper is to analyse the effect of economic development on the influence of country-level determinants on corporate debt maturity, bearing in mind firm size and the period of financial crisis.
Design/methodology/approach
The authors employ panel data estimation with fixed effects to examine the role of economic development in influencing the relationship between country-level determinants on corporate debt maturity. The paper uses a sample of 30,727 listed firms, belonging to 39 countries, over the period 2005–2012.
Findings
Corporate debt maturity increases with the efficiency of the legal system and bank concentration and decreases with the weight of banks in the economy. However, the importance of these country determinants is greater in developing than in developed countries. The authors also show that firm size in developed and developing countries influences country determinants of corporate debt maturity. Finally, the results reveal that the financial crisis has affected the debt maturity of firms differently in developed and developing countries, with the effect of bank concentration lengthening debt maturity, this effect being more pronounced in developing countries.
Practical implications
The findings provide useful insights to guide policy decisions providing access to long-term financing, as corporate debt maturity depends on economic development, institutional environment, banking structure and firm size.
Originality/value
This study incorporates economic development in explaining the relationship between country-level determinants and corporate debt maturity.
Details