Search results

The purpose of this article is to support current efforts by policymakers to limit the value of implicit bank debt guarantees that they are perceived as providing. It does so by analyzing the determinants of the value of such guarantees and by proposing a framework for categorizing and analyzing the host of different financial regulatory reform measures recently adopted and proposed.

The starting point is the observation that public authorities have provided the guarantor-of-last-resort function in more explicit form as part of the financial safety net. This choice has inadvertently further entrenched the perception that bank debt benefits from an implicit guarantee and, in the meantime, policymakers have decided to limit the value of such guarantees. To support these efforts, the present articles use a valuation framework based on concepts of contingent claims analysis to model the value of insurance of risky bank debt when the sovereign providing the guarantee can itself be risky. This framework allows one to monitor any progress made in reducing the value of these guarantees. It is applied here to a measure of implicit external (mostly from the sovereign) support for the debt of a panel of 184 large worldwide banks headquartered in 23 countries for the period from 2007 to 2012.

Consistent with the implications of the conceptual model, the empirical evidence suggests that implicit bank debt support is higher, the lower the bank's stand-alone creditworthiness and the higher the sovereign's creditworthiness. The result is consistent with previous work that showed that the decline in the value of implicit bank debt guarantees most recently observed owes much to reduced strength of the sovereigns seen as providing the guarantees. Obviously, a more desirable way to limit the value of implicit bank debt guarantees is to foster the intrinsic strength of banks. Alternative categories of policy measures aim at withdrawing the guarantee function or charging for its use.

The author is not aware of any similar work using a rigid theoretical and empirical framework to structuring the policy discussion on bank regulatory reform.

Although service guarantees are generally believed to give firms a competitive edge, much remains to be learned about the value of, and return on, this customer relationship management strategy. This study aims to examine the influence of implicit service guarantees on two important aspects of business performance: customer satisfaction and return on investment.

The study hypotheses are tested utilizing three different sources of secondary data to assess the study variables.

Over a four-year period, top implicit service guarantee provider firms generated superior market and financial performance in terms of customer satisfaction and return on investment than their industry peers

Research limitations/implications

The number of top implicit service guarantee provider firms used to test the study hypotheses is relatively small due to inherent constraints associated with using secondary data. Testing more exemplar firms against their respective industry averages would have been preferable and may have yielded even more robust findings.

Firms recognized for leveraging customer service skills and resources to “make right” any sources of customer dissatisfaction may achieve positional advantages associated with superior business performance. Therefore, focusing on building a firm's reputation for exceptional customer service provision may be a more effective approach than offering an explicit service guarantee.

This research offers support for contentions that customers value the implicit service guarantees associated with firms recognized for outstanding customer service and responds to calls for research that evaluates the specific information that must be communicated to customers to enhance the credibility and effectiveness of service guarantees.

Motivated by recent congressional interest in eradicating government sponsored enterprises (GSE), the purpose of this paper is to develop a framework to price the implicit government guarantee embedded in the bonds issued by the Farm Credit System.

The paper uses the Black‐Scholes model to extract the implied volatilities of the guarantee and then substitute into the model the volatility in historical land prices. The model is developed along the lines of Merton's bond pricing formulation of implicit calls and puts on bond yield risk and default.

Bottom line results show that the average bond yield for a 3M Farm Credit bond from January 13th 2009 to February 10th 2011 would be 0.3744 percent if the Farm Credit System had no GSE status, which is 13.62 bps higher than the actual bond yield. The difference between the hypothetical yield and the actual yield increases with increasing maturity and reaches its peak with 10Y bond where the difference between the hypothetical yield and the actual yield is 68.81 bps. The paper concludes that given the current state of the agricultural credit market in the USA that loss of GSE status and the implied guarantee of Farm Credit bonds would have a minimal effect on short term notes, with a more substantive increase in longer term yields.

The GSE status of the Farm Credit System is an important political issue. This paper provides first estimates of what impact might result from its loss of GSE status. The methods employed are consistent with current models of bond pricing and the results are of direct relevance to Farm Credit System regulators and congressional discussions.

Farm credit is important, if the Farm Credit System loses its GSE status this might affect the competitive balance between commercial and system lenders.

This paper uses option price theory based upon the spread between farm credit bonds and treasury. The approach used requires daily data, but not all attributes of bonds are known. Nonetheless, the results show remarkable consistency for a problem that is largely understudied. There is a need for policy makers, including the US congress to understand the value of government guarantees whether implicit or explicit.

Service guarantees have been attributed the benefit of improving the overall service of a service provider. However, little research has been carried out within the area. This article focuses on one aspect of the service guarantee, the effects that service guarantees may have on service recovery. Critical incident data were collected using the critical incident interview technique with customers of RadissonSAS, a worldwide hotel chain using a service guarantee. One contribution of this article is that the interviews convey that the implicit guarantee may serve as a risk reducer, which contradicts and adds to previous research. Previous research states that only the explicit guarantee has these benefits. In this case, the guarantee does not reduce risk in the purchase or consumption stage, but after the consumption when the service has failed, as the customer finds out about the guarantee in the recovery situation. Another contribution of this article is that service guarantees are found to influence the outcome of service recovery as they affect how employees behave to recover the customer.

The purpose of this paper is to evaluate Alberta’s cattle loan guarantee program. It measures the risk premiums on lending that would accrue to banks participating in the program, estimates the value (price) of the loan guarantee, and estimates the interest subsidy provided by the program.

A cash flow model of cattle feeding is used. The model estimates a measure of risk that is applied to option pricing models to estimate the value of the guarantee.

Insurance premiums for the credit risk to lenders are 0.20 percent of the value of the loan for the entire feeding period, and 0.41 percent for backgrounding but negligible for finishing. The price of the loan guarantee estimated by the Black-Scholes model is 4.43 percent of the value of the loan and is comparable to prices estimated by the binomial model. The program provides a subsidy rate of 4.58 percent.

Charging a guarantee fee can potentially eliminate the interest subsidy inherent in the program. But this would necessitate determining the impact of the guarantee fee on the additional access to credit that has been achieved through the program.

Different levels of risk for backgrounding and finishing imply different risk premiums on cattle loans. Therefore interest on cattle loans should reflect not only the individual farmer’s risk profile but also the nature of the feeding operation.

This is the first paper to simultaneously estimate risk premiums on cattle feeding loans, the value of the loan guarantee provided by the Alberta Feeder Association Loan Guarantee Program, and the inherent interest subsidy.

The purpose of this paper is to shed light on the deleveraging impact of the anti-corruption campaign since the 18th National Congress of the Communist Party of China (CPC) on private firms with political connections, relative to those without political connections.

In this paper, taking the anti-corruption campaign employed from the end of 2012 as an exogenous shock, the authors design a quasi-experiment difference-in-difference approach to examine how the loss and failure of political connections impacts private firms’ debt financing.

The authors find that the loss and failure of political connections following the anti-corruption campaign since the 18th CPC National Congress causes the yearly new debt ratios of treatment firms with political connections to decrease, relative to those of control firms without political connections. This outcome is more pronounced for provinces with more cadres excluded in the anti-corruption campaign since the 18th CPC National Congress, which rendered politically connected firms susceptible to lose connections with central or provincial cadres. To explore the mechanism, the authors find that following the anti-corruption campaign since the 18th CPC National Congress, politically connected firms limit rent-seeking activities, whereas resource acquisition is weakened. The authors also find that the impact of the anti-corruption campaign since the 18th CPC National Congress on the debt financing of politically connected firms, relative to their counterparts, is more pronounced for groups with high levels of information asymmetry and for less explicit guarantee groups. Finally, politically connected firms are more likely to be dominated by internal funds in dealing with a loss of advantages in debt financing, compared with their counterparts without political connections.

The findings in this study suggest that the loss or failure of previous political connections following Xi’s anti-corruption campaign make politically connected firms lose the advantages in debt financing through the rent-seeking, resource acquisition, information asymmetry, implicit guarantee channels, which provide new evidence for research on the impact of the anti-corruption campaign since the 18th CPC National Congress on private firms’ financing behaviors via the loss or failure of existing political connections.

The findings in the study will have some inspiration for policy makers and entrepreneur.

This study provides new evidence on the different impacts of Xi’s anti-corruption campaign on private firm’s debt financing between politically connected and unconnected firms.

This chapter explores correspondences between the costs and benefits of financial and circus safety nets. The author stresses the idea that the character of a country's net cannot be static. It must adapt promptly to changes in the market, legal, bureaucratic, and ethical problems it is intended to alleviate.

Safety nets expand over time for two reasons. First, large firms whose operations lie formally outside the net have strong incentives to make themselves too difficult for authorities to fail and unwind in crisis circumstances. Second, in good times, safety-net managers underinvest in crisis planning. As a result, crisis-generated changes in the ordering of regulatory norms dispose them to rescue firms that are difficult to fail and unwind without holding themselves closely accountable for either the costs or the distributional effects of the subsidies the rescue engenders.

The paper aims to investigate whether the value of banks is affected by their financing policies. Higher capital requirements have been invoked by exploiting a renewed edition of the Modigliani–Miller (M&M) theorem. This paper shows the limits of this claim by highlighting that the general statement that “bank equity is not expensive” can be misleading. The authors argue that market prices should play an important role in bank supervision. Expectations of future profits in prices supply timely information on the viability of a bank.

The authors use the Merton model to show the inapplicability of M&M theorem to banks. The long-run viability of a bank is analyzed with a dividend discount model which allows to compare a bank’s long-term profitability with its overall cost of capital implicit in market prices.

The authors show that the M&M framework cannot be applied to banks neither ex-ante nor ex-post. Ex-ante the authors focus on government guarantees, ex-post they emphasize the risk-shifting phenomena that may increase the overall risk of the bank. The authors show that a bank’s stability cannot be achieved if the market expectations of its future profits stay below the cost of funding.

The authors use simple analytical models. In a future study, some key peculiarities of banks, such as the monetary nature of deposits, should be analytically modelled.

The paper contributes to the debate on capital regulation on the level of capital requirements and the instruments to assess the viability/stability of banks.

This paper uses simple models to assess analytically the key issues in the debate on banks’ capital regulation.

Systemic banking crises can have devastating effects on the economies of developing or industrialized countries. This paper reviews the factors that weaken banking systems and make them more susceptible to crises. It is the first of two papers examining root causes of banking crises and time-consistent policies for resolving them.

Amidst the backdrop of a wide array of structural developments that have revolutionized the competitive landscape of Indian commercial banking, this paper aims to empirically examine the role of two external monitoring mechanisms – competition and concentration on financial stability and further highlights the significance of bank-level heterogeneity in the nexus.

The study uses the Lerner index, defined through a translog specification, as a measure of market power. A system generalized method of moments technique accounts for the dynamic associations among the competition-concentration-stability nexus. The study further examines the moderating effect of ownership, size and capitalization on the nexus. The study also uses the Boone indicator and comments on the competition-bank stability relationship after controlling for bank governance.

The findings indicate that banks are less stable in a more competitive and higher concentrated environment. Exploring bank-level heterogeneity, first, the authors report that as competition increases, state-owned banks have greater incentives to undertake risky activities than private and foreign banks, which point to implicit sovereign guarantees that characterize the former. Second, the authors document an adverse influence of competition on the soundness of larger banks consistent with the “too-big-to-fail” assertion. Third, results corroborate the disciplinary role of regulatory capital and lend support to stricter capital norms under Basel III in a more competitive environment.

This paper is perhaps the first to capture competition and concentration in a single model; to reconcile conflicting evidence on competition-risk nexus; to shed light on the joint effect of competition and Basel accords for Indian banks.