This paper studies loan conditions when firms switch banks. Recent theoretical work on bank–firm relationships motivates our matching models. The dynamic cycle of the loan rate that we uncover is as follows: a loan granted by a new (outside) bank carries a loan rate that is significantly lower than the rates on comparable new loans from the firm's current (inside) banks. The new bank initially decreases the loan rate further but eventually ratchets it up sharply. Other loan conditions follow a similar economically relevant pattern. This bank strategy is consistent with the existence of hold-up costs in bank–firm relationships.
We study a continuous-time principal–agent model in which a risk-neutral agent withlimited liability must exert unobservable effort to reduce the likelihood of large but rel- atively infrequent losses. Firm size can be decreased at no cost or increased subject to adjustment costs. In the optimal contract, investment takes place only if a long enough period of time elapses with no losses occurring. Then, if good performance continues, the agent is paid. As soon as a loss occurs, payments to the agent are suspended, and so is investment if further losses occur. Accumulated bad performance leads to downsiz- ing. We derive explicit formulae for the dynamics of firm size and its asymptotic growth rate, and we provide conditions under which firm size eventually goes to zero or grows without bounds.KEYWORDS: Principal–agent model, limited liability, continuous time, Poisson risk, downsizing, investment, firm size dynamics.
We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the interbank market for liquidity leads banks to engage in what we term “liquidity pull-back,” which involves selling financial assets either by banks directly or by levered investors. Empirical tests support this hypothesis. While our data covers part of the recent crisis period, our results are not driven by the crisis. Our general point is that money matters in financial markets. Different financial assets have different degrees of moneyness (liquidity) and, as a result, there are systematic cross-sectional variations in trading activity as the price of liquidity, or the level of tightness, in the interbank market fluctuates.
In many countries structured investment products are popular among retail investors.Weexplain the demand for these products using unique field data where we let subjects freely design their “favorite” structured product. Results suggest that the supply with capital protected products (guarantee certificates) might indeed be demand-driven. This does not seem to be the case for other product categories where marketing and sales practices might play a more important role. In a surveyamong financial practitioners we find furthermore that a demand for capital protected products can be explained by loss aversion and saving motifs, e.g. for buying a house.
Despite the enormous growth of the asset management industry during the pastdecades, little is known so far about the asset pricing implications of investmentintermediaries. Investment objectives of professional asset managers such as mutualfunds differ from those of private households. However, standard models of invest-ment theory do not address the distinction between direct investing and delegatedinvesting. Our objective is to get a formal understanding of equilibrium implica-tions of delegated asset management. In a model with endogenous delegation, we¯nd that delegation under benchmarking leads to more informative prices, to a betaadjustment, and to signi¯cantly lower equity premia.
Empirical evidence shows that banks tend to lend too much during booms, and too littleduring recessions. Thus, instead of dampening productivity shocks, the banking sectortends to exacerbate them, leading to excessive fluctuations of credit, output and assetprices. We propose a simple explanation for this dysfunctionality of credit markets. Thisexplanation relies on three ingredients that are characteristic of modern banks’ activities.The first ingredient is moral hazard: banks are supposed to monitor the small and mediumsized enterprises that borrow from them, but they may shirk on their monitoring activities,unless they are given sufficient informational rents. These rents limit the amount thatinvestors are ready to lend them, to a multiple of the banks’ own capital. The secondingredient is the banks’ high exposure to aggregate shocks: banks’ assets have positivelycorrelated returns. Finally the third ingredient is the ease with which modern banks canreallocate capital between different lines of business. At the competitive equilibrium ofthe financial sector, banks offer privately optimal contracts to their investors but thesecontracts are not socially optimal: banks’ decisions of reallocating capital react too stronglyto aggregate shocks. This is because banks do not internalize the impact of their decisionson asset prices. This generates excessive fluctuations of credit, output and asset prices. Weexamine the efficacy of several possible policy responses to this dysfunctionality of creditmarkets, and show that it can provide a rationale for macroprudential regulation.Keywords: Bank Credit Fluctuations, Macro-prudential Regulation, Investment Externalities.JEL: G21, G28, D86
Im Streit um höhere Sicherheiten für die Grossbanken stellt sich der Bankenprofessor Urs Birchler auf die Seite der Nationalbank. Wenn die CS und die UBS ihre Kapitalbasis nicht erhöhten, sei das gefährlich.
Früher gab es Betrug nur an den Rändern des Finanzgeschäfts. Heute vergiftet die rücksichtslose Jagd nach schnellem Geld die Kultur von Märkten und Banken.
