Search Results
Journal Article
Risk-adjusted performance of mutual funds
Mutual funds are now the preferred way for individual investors and many institutions to participate in capital markets, and their popularity has increased demand for evaluations of fund performance. Many business publications now rank mutual funds according to their performance, and information services exist specifically for this purpose. There is no general agreement, however, about how best to measure and compare fund performance and on what information funds should disclose to investors. ; Risk and performance measurement is an active area for academic research and continues to be of ...
Journal Article
Why do banks syndicate loans?
Loan syndication, where a group of banks makes a loan jointly to a single borrower, offers several benefits. Syndication allows banks to diversify, expanding their lending to broader geographic areas and industries. Second, syndication allows banks that are constrained by their capital-asset ratios to participate in loans to larger borrowers. ; Despite these benefits, loan syndication could pose additional risks for the banking system, if the originating or lead banks withhold information about the borrower from participating banks, misleading them into making loans that are riskier than they ...
Journal Article
Model error
Modern finance would not have been possible without models. Increasingly complex quantitative models drive financial innovation and the growth of derivatives markets. Models are necessary to value financial instruments and to measure the risks of individual positions and portfolios. Yet when used inappropriately, the models themselves can become an important source of risk. Recently, several well-publicized instances occurred of institutions suffering significant losses attributed to model error. This has sharpened the interest in model risk among financial institutions and their regulators.> ...
Journal Article
Use of value at risk by institutional investors
In recent years, risk management has been of growing interest to institutional investors, including pension funds, insurance companies, endowments, and foundations, as well as the asset management firms that manage funds on their behalf. Traditionally, institutional investors, and particularly pension funds, have emphasized measuring and rewarding investment performance by their portfolio managers. In the past decade, however, many U.S. pension funds have significantly increased the complexity of their portfolios by broadening the menu of acceptable investments. At the same time, ...
Journal Article
Measuring credit risk in interest rate swaps
Journal Article
Value at risk: new approaches to risk management
Managing risk has always been an integral part of banking. In the past two years an approach to risk management called "Value at Risk" has been accepted by both practitioners and regulators as the "right" way to measure risk, becoming a de facto industry standard. Yet, the danger is that overreliance on value at risk can give risk managers a false sense of security or lull them into complacency. Value at risk is only one of many tools of managing risk, and it is based on a number of unrealistic assumptions. There is no generally accepted way to calculate it, and various methods can yield ...
Working Paper
Failed bank resolution and the collateral crunch: the advantages of adopting transferable puts
Current methods of failed bank resolution are unnecessarily expensive for taxpayers and impose substantial costs on borrowers at failed banks. This situation is due to distorted incentives imbedded in the standard contract between the government and acquirers of failed banks, which result in more loan foreclosures than if the loan were held by a well-capitalized bank. This paper proposes a modification to the standard contract in the form of a transferable put, which would introduce market-based incentives to the disposition of failed bank assets.
Journal Article
A new look at reverse mortgages: potential market and institutional constraints
Most elderly hold a significant portion of their non-pension wealth in housing equity. Although they might prefer to use this housing equity to finance current consumption, to pay for an emergency, or to help out a relative in need, utilizing this wealth, would force the sale of their home. Traditional home equity lines of credit require that principal and interest be paid back over a fixed time interval, yet many elderly want to avoid mortgage payments because they live on a limited income. Reverse mortgages hold the promise of helping elderly homeowners out of this bind by allowing them to ...
Journal Article
Do capital markets predict problems in large commercial banks?
In the present climate of intense debate over deposit insurance reform, the nature and limits of market discipline become especially important. The widely accepted argument for greater reliance on market discipline is that it will restrain managerial risk-taking and reduce potential losses to the deposit insurance fund. Opponents of this view favor the traditional reliance on supervision by the bank regulatory agencies as the primary method to maintain the safety and soundness of the banking system and the integrity of the deposit insurance fund. ; This article attempts to shed some empirical ...
Journal Article
Interest rate derivatives and asset-liability management by commercial banks
Bank participation in derivative markets has risen sharply in recent years. The total amount of interest rate, currency, commodity, and equity contracts at U.S. commercial and savings banks soared from $6.8 trillion in 1990 to $11.9 trillion in 1993, an increase of 75 percent. A major concern facing policymakers and bank regulators today is the possibility that the rising use of derivatives has increased the riskiness of individual banks and of the banking system as a whole.> This study uses quarterly Call Report data to shed some light on the pattern of derivative use by U.S. commercial ...