ABSTRACT Sumario: Introduction to banking and the financial-services industry -- Banking theory a... more ABSTRACT Sumario: Introduction to banking and the financial-services industry -- Banking theory and financial management -- Financial innovation and the technological, regulatory, and interest-rate environment of the financial-services industry -- The big picture: bank valuation, performance and cost analyses, strategic planning, executive compensation, and asset-liability management -- Management of bank portfolio risks and selling bank products and services -- Bank capital structure, market valuation, and financing issues -- Specail banking topics.
This paper examines empirical evidence pertaining to the hedging and derivatives activities of U.... more This paper examines empirical evidence pertaining to the hedging and derivatives activities of U.S. commercial banks. Because banks use derivatives for hedging, dealing, or both, the framework for the analysis includes both contemporary theories of banking and of hedging behavior. Although the growth in the use of derivatives by banks has been explosive, it has not been an industry-wide phenomenon. Out of approximately 11,000 commercial banks, only about 600 are involved in derivatives activities. Using both descriptive tests and regression analysis, we find that users of derivatives have weaker capital positions, smaller maturity gaps, lower net interest margins, and use more notes and debentures to fund assets; but most importantly, they are much larger banks. This last result seems to imply the existence of significant barriers to entry and economies of scale or scope related to the availability of information and technical expertise.
This paper analyzes the performance and balance-sheet characteristics of banks in postwar Lebanon... more This paper analyzes the performance and balance-sheet characteristics of banks in postwar Lebanon for the years 1993 to 2000. Although we find that Lebanese banks are profitable, most of them had accounting return on assets (ROA) greater than one percent over most of our test period, they are not as profitable as a control group of banks from five other countries located in the Middle East. Bank safety and soundness in Lebanon has increased as leverage was reduced (capital adequacy improved) and a risk index indicates lower probabilities of book-value insolvency. We attribute this improved bank performance and safety to better management and to three external factors: political (cessation of war), economic (lower inflation), and regulatory (BIS capital requirements). We employ regression models that relate bank profitability ratios to various explanatory variables. We find, for example, that ROA is positively associated with lagged growth in real GDP, spread or net interest margin, and holdings of Lebanese T-bills but negatively related to bank size as measured by the natural log of total assets. As a policy implication, we recommend that Lebanese banks increase their lending to the private sector to achieve a more efficient allocation of resources and to stimulate economic growth. To help achieve this objective, Banque du Liban, the central bank, should abandon its practice of setting T-bill rates above market levels, which provides a disincentive to bank lending.
... The empirical findings indicate that measures of banking factors such as asset composition, l... more ... The empirical findings indicate that measures of banking factors such as asset composition, loan characteris-tics, capital adequacy, sources and uses of revenue, efficiency, and ... The first section of this paper deals briefly with the definition and importance of problem banks. ...
* The existence and determinants of an optir policy for compensating top executives ar< is... more * The existence and determinants of an optir policy for compensating top executives ar< issues in corporate finance. This paper investif the firm's set of investment opportunities amount and type of executive compensation investment-opportunity set potentially affects agency ...
Using a Parkin-type model, this paper tests for the responsiveness of large banks" portfolio deci... more Using a Parkin-type model, this paper tests for the responsiveness of large banks" portfolio decisions to exogenous factors over the period 1972 to 1978. Based upon aggregate weekly data (adjusted for first-order autocorrelation) and a restricted least-squares estimation procedure, the empirical results indicate significant differences in behavior (i.e., structural changes) over the business cycle. Previous studies have implicitly assumed that such behavior is constant over the cycle or that differences over the cycle are not significant. This research shows that the assumption is untenable and that the differences over the cycle are statistically significant. Since these patterns vary over the business cycle, the differences should be incorporated into models of bank balance-sheet behavior to avoid misleading interpretations and implications.
Journal of Financial Services Research, Dec 1, 1988
This article tests an income-smoothing hypothesis for a sample of 106 large bank holding companie... more This article tests an income-smoothing hypothesis for a sample of 106 large bank holding companies for the period 1976 to 1984. Our focus is on the behavior of the provision for loan losses as a function of bank income and alternative measures of business conditions likely to affect loan portfolio risk-taking or quality. Using an econometric model with pooled time-series, cross-sectional data, we find evidence of income-smoothing behavior over our test period. Our dummy-variable models indicate that regional banking companies tend to engage in income smoothing more than money-center banks. Alternative motivations for income-smoothing behavior, which include bank regulatory policy, risk management, agency theory, and compensation policy, are explored and their policy implications considered.
... 6. Bank Capital and Its Adequacy. Part 3: THE BIG PICTURE.: STRATEGIC PLANNING, RISK MANAGEME... more ... 6. Bank Capital and Its Adequacy. Part 3: THE BIG PICTURE.: STRATEGIC PLANNING, RISK MANAGEMENT, AND THE MEASUREMENT OF BANK PERFORMANCE. 7. Managing Value and Bank Strategic Planning in the Financial-Services Industry. ...
From March through May of 1994, several large non®nancial ®rms announced millions of dollars in l... more From March through May of 1994, several large non®nancial ®rms announced millions of dollars in losses from derivatives deals, especially those arranged by Bankers Trust. Accompanying these announcements and related news stories were allegations that Bankers Trust had either misrepresented, lied, or deceived its clients. Using SUR methods, we investigate how these announcements aected Bankers Trust and three portfolios of banks: dealers, nondealers, and nonusers. Our results indicate signi®cant cumulative abnormal returns of À12.14% (Bankers Trust), À5.56% (13 dealer banks), and À2.45% (32 nondealer, user banks). The evidence suggests an intra-industry, information-transfer eect consistent with rational pricing. The replacement cost of derivative contracts is an important factor in explaining the variation in abnormal returns across banks.
Journal of Financial Services Research, Jun 1, 1993
This article measures the riskiness and profitability of financial institutions specializing in c... more This article measures the riskiness and profitability of financial institutions specializing in credit-card loans and related plans. Focusing on explicit accounting returns on explicit credit-card assets, we find that credit-card banks, whether subsidiaries of bank holding ...
The Quarterly Review of Economics and Finance, Dec 1, 2000
While the use of derivatives by U.S. commercial banks has exploded in recent years, the growth ha... more While the use of derivatives by U.S. commercial banks has exploded in recent years, the growth has not been evenly distributed. At present, only about five percent of banks are involved in the market for derivatives. Although the concentration of derivatives activities in the largest banks is well known, we know less about other factors underlying a bank's decision to use derivatives. This article investigates the financial characteristics of banks that use derivatives and those that do not. We find that user banks, compared to nonusers, are associated with riskier capital structures (more notes and debentures and less equity capital), larger maturity mismatches between assets and liabilities, greater net loan charge-offs, and lower net interest margins. We also find that banks, especially smaller ones, benefit from being associated with bank-holding companies. Finally, our evidence does not support a regulatory hypothesis in which banks must have stronger capital positions to engage in derivative activities.
Journal of Financial and Quantitative Analysis, Dec 1, 1977
... The failures of Franklin National Bank of New York and United States National Bank of San Die... more ... The failures of Franklin National Bank of New York and United States National Bank of San Diego, the emergency merger of Security National Bank of ... The statistic used in the outlier tests is achi-square score which indi-cates the degree of similarity between Franklin's variable ...
... However, in practice, bank capital and examiners' "substandard" loan classific... more ... However, in practice, bank capital and examiners' "substandard" loan classifications (as manifested in the FDIC's NCR) are the important variables. On average, substandard loans account for about 80 percent of a problem bank's classified loans. ...
... 218 : MONEY, CREDIT, AND BANKING ... Based on the more meaningful market-value capital ratio,... more ... 218 : MONEY, CREDIT, AND BANKING ... Based on the more meaningful market-value capital ratio, we find that the market inflicted more damage on BHCs with ... Tests Relating Changes in BHC Equity Values to Changes in Malues of Brazil's Debt Based on bid and asked market ...
... Rendleman, Jr. for their helpful comments on various drafts of this paper. This paper was wri... more ... Rendleman, Jr. for their helpful comments on various drafts of this paper. This paper was written while James Miles was at the University of Georgia. 'See Scheibla [7], p. 24. pensation for the agreed-upon loan package. Since ...
... restric-tions in the corporate control market, or the protection of the syndicated loan marke... more ... restric-tions in the corporate control market, or the protection of the syndicated loan market fromcompetition from other ... for banks, they may be seen by the market as more valuable than loan renewals to the banking firm because they present greater growth opportunities. ...
ABSTRACT Sumario: Introduction to banking and the financial-services industry -- Banking theory a... more ABSTRACT Sumario: Introduction to banking and the financial-services industry -- Banking theory and financial management -- Financial innovation and the technological, regulatory, and interest-rate environment of the financial-services industry -- The big picture: bank valuation, performance and cost analyses, strategic planning, executive compensation, and asset-liability management -- Management of bank portfolio risks and selling bank products and services -- Bank capital structure, market valuation, and financing issues -- Specail banking topics.
This paper examines empirical evidence pertaining to the hedging and derivatives activities of U.... more This paper examines empirical evidence pertaining to the hedging and derivatives activities of U.S. commercial banks. Because banks use derivatives for hedging, dealing, or both, the framework for the analysis includes both contemporary theories of banking and of hedging behavior. Although the growth in the use of derivatives by banks has been explosive, it has not been an industry-wide phenomenon. Out of approximately 11,000 commercial banks, only about 600 are involved in derivatives activities. Using both descriptive tests and regression analysis, we find that users of derivatives have weaker capital positions, smaller maturity gaps, lower net interest margins, and use more notes and debentures to fund assets; but most importantly, they are much larger banks. This last result seems to imply the existence of significant barriers to entry and economies of scale or scope related to the availability of information and technical expertise.
This paper analyzes the performance and balance-sheet characteristics of banks in postwar Lebanon... more This paper analyzes the performance and balance-sheet characteristics of banks in postwar Lebanon for the years 1993 to 2000. Although we find that Lebanese banks are profitable, most of them had accounting return on assets (ROA) greater than one percent over most of our test period, they are not as profitable as a control group of banks from five other countries located in the Middle East. Bank safety and soundness in Lebanon has increased as leverage was reduced (capital adequacy improved) and a risk index indicates lower probabilities of book-value insolvency. We attribute this improved bank performance and safety to better management and to three external factors: political (cessation of war), economic (lower inflation), and regulatory (BIS capital requirements). We employ regression models that relate bank profitability ratios to various explanatory variables. We find, for example, that ROA is positively associated with lagged growth in real GDP, spread or net interest margin, and holdings of Lebanese T-bills but negatively related to bank size as measured by the natural log of total assets. As a policy implication, we recommend that Lebanese banks increase their lending to the private sector to achieve a more efficient allocation of resources and to stimulate economic growth. To help achieve this objective, Banque du Liban, the central bank, should abandon its practice of setting T-bill rates above market levels, which provides a disincentive to bank lending.
... The empirical findings indicate that measures of banking factors such as asset composition, l... more ... The empirical findings indicate that measures of banking factors such as asset composition, loan characteris-tics, capital adequacy, sources and uses of revenue, efficiency, and ... The first section of this paper deals briefly with the definition and importance of problem banks. ...
* The existence and determinants of an optir policy for compensating top executives ar< is... more * The existence and determinants of an optir policy for compensating top executives ar< issues in corporate finance. This paper investif the firm's set of investment opportunities amount and type of executive compensation investment-opportunity set potentially affects agency ...
Using a Parkin-type model, this paper tests for the responsiveness of large banks" portfolio deci... more Using a Parkin-type model, this paper tests for the responsiveness of large banks" portfolio decisions to exogenous factors over the period 1972 to 1978. Based upon aggregate weekly data (adjusted for first-order autocorrelation) and a restricted least-squares estimation procedure, the empirical results indicate significant differences in behavior (i.e., structural changes) over the business cycle. Previous studies have implicitly assumed that such behavior is constant over the cycle or that differences over the cycle are not significant. This research shows that the assumption is untenable and that the differences over the cycle are statistically significant. Since these patterns vary over the business cycle, the differences should be incorporated into models of bank balance-sheet behavior to avoid misleading interpretations and implications.
Journal of Financial Services Research, Dec 1, 1988
This article tests an income-smoothing hypothesis for a sample of 106 large bank holding companie... more This article tests an income-smoothing hypothesis for a sample of 106 large bank holding companies for the period 1976 to 1984. Our focus is on the behavior of the provision for loan losses as a function of bank income and alternative measures of business conditions likely to affect loan portfolio risk-taking or quality. Using an econometric model with pooled time-series, cross-sectional data, we find evidence of income-smoothing behavior over our test period. Our dummy-variable models indicate that regional banking companies tend to engage in income smoothing more than money-center banks. Alternative motivations for income-smoothing behavior, which include bank regulatory policy, risk management, agency theory, and compensation policy, are explored and their policy implications considered.
... 6. Bank Capital and Its Adequacy. Part 3: THE BIG PICTURE.: STRATEGIC PLANNING, RISK MANAGEME... more ... 6. Bank Capital and Its Adequacy. Part 3: THE BIG PICTURE.: STRATEGIC PLANNING, RISK MANAGEMENT, AND THE MEASUREMENT OF BANK PERFORMANCE. 7. Managing Value and Bank Strategic Planning in the Financial-Services Industry. ...
From March through May of 1994, several large non®nancial ®rms announced millions of dollars in l... more From March through May of 1994, several large non®nancial ®rms announced millions of dollars in losses from derivatives deals, especially those arranged by Bankers Trust. Accompanying these announcements and related news stories were allegations that Bankers Trust had either misrepresented, lied, or deceived its clients. Using SUR methods, we investigate how these announcements aected Bankers Trust and three portfolios of banks: dealers, nondealers, and nonusers. Our results indicate signi®cant cumulative abnormal returns of À12.14% (Bankers Trust), À5.56% (13 dealer banks), and À2.45% (32 nondealer, user banks). The evidence suggests an intra-industry, information-transfer eect consistent with rational pricing. The replacement cost of derivative contracts is an important factor in explaining the variation in abnormal returns across banks.
Journal of Financial Services Research, Jun 1, 1993
This article measures the riskiness and profitability of financial institutions specializing in c... more This article measures the riskiness and profitability of financial institutions specializing in credit-card loans and related plans. Focusing on explicit accounting returns on explicit credit-card assets, we find that credit-card banks, whether subsidiaries of bank holding ...
The Quarterly Review of Economics and Finance, Dec 1, 2000
While the use of derivatives by U.S. commercial banks has exploded in recent years, the growth ha... more While the use of derivatives by U.S. commercial banks has exploded in recent years, the growth has not been evenly distributed. At present, only about five percent of banks are involved in the market for derivatives. Although the concentration of derivatives activities in the largest banks is well known, we know less about other factors underlying a bank's decision to use derivatives. This article investigates the financial characteristics of banks that use derivatives and those that do not. We find that user banks, compared to nonusers, are associated with riskier capital structures (more notes and debentures and less equity capital), larger maturity mismatches between assets and liabilities, greater net loan charge-offs, and lower net interest margins. We also find that banks, especially smaller ones, benefit from being associated with bank-holding companies. Finally, our evidence does not support a regulatory hypothesis in which banks must have stronger capital positions to engage in derivative activities.
Journal of Financial and Quantitative Analysis, Dec 1, 1977
... The failures of Franklin National Bank of New York and United States National Bank of San Die... more ... The failures of Franklin National Bank of New York and United States National Bank of San Diego, the emergency merger of Security National Bank of ... The statistic used in the outlier tests is achi-square score which indi-cates the degree of similarity between Franklin's variable ...
... However, in practice, bank capital and examiners' "substandard" loan classific... more ... However, in practice, bank capital and examiners' "substandard" loan classifications (as manifested in the FDIC's NCR) are the important variables. On average, substandard loans account for about 80 percent of a problem bank's classified loans. ...
... 218 : MONEY, CREDIT, AND BANKING ... Based on the more meaningful market-value capital ratio,... more ... 218 : MONEY, CREDIT, AND BANKING ... Based on the more meaningful market-value capital ratio, we find that the market inflicted more damage on BHCs with ... Tests Relating Changes in BHC Equity Values to Changes in Malues of Brazil's Debt Based on bid and asked market ...
... Rendleman, Jr. for their helpful comments on various drafts of this paper. This paper was wri... more ... Rendleman, Jr. for their helpful comments on various drafts of this paper. This paper was written while James Miles was at the University of Georgia. 'See Scheibla [7], p. 24. pensation for the agreed-upon loan package. Since ...
... restric-tions in the corporate control market, or the protection of the syndicated loan marke... more ... restric-tions in the corporate control market, or the protection of the syndicated loan market fromcompetition from other ... for banks, they may be seen by the market as more valuable than loan renewals to the banking firm because they present greater growth opportunities. ...
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