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Working Paper
Revenge of the steamroller: ABCP as a window on risk choices
We empirically examine financial institutions' motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in the summer of 2007. We find evidence consistent with important roles for both owner-manager agency problems and government-induced distortions, especially government control or ownership of banks.
Conference Paper
Does lending by banks and finance companies differ?
Working Paper
A guide to choosing absolute bank capital requirements
Resampling implementation of a stress-scenario approach to estimating portfolio default loss distributions is proposed as the basis for estimates of the appropriate absolute level of economic capital allocations for portfolio credit risk. Estimates are presented for stress scenarios of varying severity. Implications of use of different analysis time horizons are analyzed. Results for a numeraire portfolio are quite sensitive to such variations. Although the analysis is framed in terms of recent proposals to revise regulatory capital requirements for banks, the arguments and results are also ...
Journal Article
Recent developments in the market for privately placed debt
Working Paper
The Bank as Grim Reaper : Debt Composition and Bankruptcy Thresholds
We offer a model and evidence that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. The model, in the spirit of Black and Cox (1976), implies that the recovery rate at emergence from bankruptcy on all of the firm's debt taken together is increasing in the pre-bankruptcy share of private debt in all debt. Empirical evidence supports this and other implications of the model. Indeed, debt composition has a more economically material empirical influence on recovery than all other variables we try taken together.
Journal Article
Credit risk rating at large U.S. banks
Large banks use internally developed credit rating systems to differentiate the riskiness of their commercial loans. Internal ratings are an essential ingredient of effective credit risk management for such banks, whose commercial borrowers may number in the tens of thousands. This article describes these rating systems, how their design varies across institutions, and how they are used in risk management. The article also outlines conceptual and practical difficulties currently faced by banks in achieving accurate and consistent ratings and describes ways in which some institutions have ...
Working Paper
Is the corporate loan market globally integrated? a pricing puzzle
We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the U.S., other things equal. Differences in borrower, loan and lender characteristics associated with equilibrium mechanisms suggested in the literature do not appear to explain the phenomenon. Borrowers overwhelmingly issue in their natural home market and bank portfolios display significant home "bias." This may explain why pricing discrepancies are not competed away, but the fundamental causes of the discrepancies remain a puzzle. Thus, ...
Working Paper
Does corporate lending by banks and finance companies differ? Evidence on specialization in private debt contracting
This paper establishes empirically that specialization in private-market corporate lending exists, adding a new dimension to the public vs. private debt distinctions now common in the literature on debt contracting and financial intermediation. Using a large database of individual loans, we compare lending by finance companies to that by banks. The evidence implies that it is intermediaries in general that are special in solving information problems, not banks in particular. But lending by the two types of institutions is not identical. Finance companies tend to serve observably riskier ...