HANDBOOK OF FINANCIAL INTERMEDIATION AND BANKING

Transcription

1 HANDBOOK OF FINANCIAL INTERMEDIATION AND BANKING Edited by Anjan V. Thakor Arnoud W. A. Boot ELSEVIER, AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO North-Holland is an imprint of Elsevier

2 List of Contributors Preface Introduction to the Series xiii xv xxv Section 1 Design of Contracts and Securities 1 Overview by Franklin Allen (Pennsylvania) 1 The Design of Debt Contracts 5 Paolo Fulghieri (UNC) and Eitan Goldman (Indiana University, Bloomington) 1. Introduction 6 2. Debt Contracts and Costly State Verification Multiperiod Contracts Stochastic Monitoring v Debt Contracts and the Allocation of Control Rights Debt Contracts and the Provision of Incentives Debt Contracts under Asymmetric Information The Structure of Debt Contracts Seniority Maturity Structure Collateral The Number of Creditors Concluding Remarks 36 References 36 2 Subordination Levels in Structured Financing 41 Xudong An (SDSU), Yongheng Deng (USC), and Anthony B. Sanders (ASU) 1. Introduction Structured Financing and the Pooling and Tranching of Assets 43

3 VI Contents 3. CMBS Structure CMBS Subordination Research Question and Empirical Approach The Deal Subordination Regression The Chow Test for Structural Change Data Results Regression Results Structural Change and Chow Tests Conclusion 58 References 59 Section 2 Market Structure and Structure of Financial Markets 61 3 Limit Order Markets: A Survey 63 Christine A. Parlour (UCB) and Duane J. Seppi (CMU) 1. Introduction Modeling Limit Orders Static Equilibrium Models Equilibrium Models with Static Order Choice and a Terminal Penalty Dynamic Optimal Control Models for Single Agents Multiperiod Equilibrium Models Limit Orders and Private Information Market Design Competition and Limit Order Markets Imperfect Competition Dealer Markets Welfare Robustness Transparency Questions for Future Research 92 References 93 Section 3 Financial Intermediary Structure 97 Overview by Mitchell Berlin (FRB Philadelphia) 4 Bank Structure and Lending: What We Do and Do Not Know 107 Philip E. Strahan (Boston College, Wharton, NBER) 1. Introduction 108

4 Vll 2. Bank Size and Lending Do Large Banks Lend More Than Small? Do Large Banks Lend Differently from Small Banks? Ill 2.3. Bank Size, Organization Structure, and Lending How Does Bank Size Affect Credit Availability? Deposit-Lending Synergies Do Deposits Make Banks Better Lenders? Banks as Liquidity Providers Conclusion 125 References Optimal Industrial Structure in Banking 133 Loretta J. Mester (FRB Philadelphia, The Wharton School) 1. Introduction and Motivation Efficiency Concepts Empirical Implementation Bank Production Cost Minimization Profit Maximization More Complicated Objectives Measurement Estimation Techniques O Functional Form, Variable Selection, and Variable Measurement Special Issues in Banking Empirical Findings in the Literature Scale Economies Scope Economies X-Efficiency 158 h 5.4. Productivity Conclusion 160 References Commercial Banks in Investment Banking 163 Amar Gande (SMU) 1. Introduction Tradeoffs in Combining Lending and Underwriting Costs of Combining Lending and Underwriting Benefits of Combining Lending and Underwriting Theory Empirical Evidence from Debt Underwritings Empirical Evidence from Equity Underwritings Organizational Form of Underwriting 178

5 viii. Contents 3. Competitive Effects of Commercial Bank Entry into Securities Underwriting Theory Empirical Evidence on Commercial Bank Entry in Empirical Evidence on the Financial Modernization Act of Conclusion 186 References 186 Section 4 Mutual Funds 189 Overview by Sudipto Bhattacharya (LSE) 7 Performance Measurement and Evaluation 191 Bruce Lehmann (UCSD) and Allan Timmermann (UCSD) 1. Introduction Theoretical Benchmarks Sources of Benchmarks A First Pass at Performance Measurement Performance Measurement and Market Timing Alternative Models of Market Timing Observable Information Signals Performance Measurement and Attribution with Observable Portfolio Weights Should Investors Hold Mutual Funds? Determining the Optimal Holdings in Mutual Funds The Cross Section of Managed Portfolio Returns Inference in the Absence of Performance Ability Power of Statistical Tests for Individual Funds Inference for Multiple Funds Empirical Specifications of Alpha Measures Bayesian Approaches Asset Mispricing and Investment in Mutual Funds Conclusion 255 References The Behavior of Mutual Fund Investors 259 Lu Zheng (UCI) 1. Introduction Examining Investor Behavior Using Fund Flows Estimating Mutual Fund Flows The Decision to Choose Among Mutual Funds ' Mutual Fund Flows and Aggregate Market Returns Investment Performance of Mutual Fund Investors 272

6 IX 4. Investor Externality Liquidity Costs Stale-Price Arbitrage Strategies of Mutual Funds Conclusion 280 References Incentives in Funds Management: A Literature Overview 285 Sudipto Bhattacharya (LSE), Amil Dasgupta (LSE), Alexander Guembel (Oxford), and Andrea Prat (LSE) 1. Introduction Theories of Incentives for Fund Managers and Informative Experts Principal-Agent Models: Effort Choice, Delegation, and Screening Optimal Contracts Based on Verifiable Portfolio Composition Choices and Returns Returns-Based and Relative Performance-Based Contracts Conformist Trading: The Roles of Career Concerns Fund Manager Incentives and Uninformed Trading General Equilibrium Implications of Fund Manager Incentives Evidence on the Choices and Rewards of Analysts and Fund Managers Conclusion 303 References ^ 303 Section 5 Regulation 305 Overview by Mark J. Flannery, University of Florida 10 Consolidation in the U.S. Banking Industry: Is the "Long, Strange Trip" About to End? ' H 309 Kenneth D. Jones (FDIC) and Tim Critchfield (FDIC) 1. Overview of Structural Change in the U.S. Banking Industry Industry Size Industry Concentration Fundamental Causes of Consolidation Environmental Factors Microeconomic Factors in Merger Decisions The Effects of Consolidation Projections of Banking Industry Structure Review of Previous Projections and Their Methodologies 333 ' 4.2. New Linear Extrapolations: A Comparison with the Literature Beyond Linear Extrapolations Conclusion 341 References 343

7 11 Safety, Soundness, and the Evolution of the U.S. Banking Industry 347 Robert DeYoung (Kansas) 1. Introduction The Evolution of the U.S. Banking Industry Financial Innovation and Technological Change Regulatory Reaction to Financial Innovation and Technological Change Widespread Technology Adoption and Industry Transformation A Stylized View of Banking Strategies Prederegulation 358 w " 3.2. Postderegulation Evidence Consistent with the Strategic Map Further Implications of Strategic Change Industry Structure Noninterest Income Financial Performance Is the Industry Safe and Sound Today? 369 References What Caused the Bank Capital Buildup of the 1990s? 375 Mark J. Flannery (Florida) and Kasturi P. Rangan (CWRU and HBS) 1. Introduction O Determining a Bank's Optimal Leverage Rising U.S. Bank Capitalization, The Supervisors' Focus: Book Capital Ratios Investors'Focus: Market Capital Ratios BHC Portfolio Volatility and Default Risks Possible Causes of the Increased Capitalization Regression Model Lags in Adjusting Toward Target Capitalization Econometric Issues Data Estimation Results Decomposing the Change in BHC Capitalization Do Higher Market Ratios Reflect Stricter Regulatory Constraints? Robustness Adjust for Possible Safety Net Subsidies in MKTRAT Alternative Instrument for BHCs'Realized Stock Return Estimates for the 20 Largest Banks Estimate for 80 "Next Largest" Banks Excluding the Charter Value Proxy 407

8 xi 8. Summary and Implications 407 References 408 Appendix 411 Estimating BHC Risk-Weighted Assets (RWA) in the Period Basel II: A Case for Recalibration 413 Paul H. Kupiec (FDIC) 1. Introduction A Review of the AIRB Capital Framework Discussion The AIRB and Financial Stability Establishing a Sound Benchmark for Risk Measurement Practices The Need for Capital for Bank Interest Expenses Procyclicality of the AIRB Soundness Standard Incorporating Portfolio Interest Income Capital for Systematic Risk in PD and LGD Random Loss Given Default and "Downturn" LGD Asymptotic Portfolio Loss Distribution Random Exposures at Default (EADs) Conclusions 437 References 438 o Section 6 Competition and Regulation in Banking 441 Overview by Xavier Vives (IESE Business and UPF) 14 Competition and Regulation in Banking 449 Elena Carletti (Frankfurt) 1. Introduction Bank Instability and the Need of Regulation Bank Fragility: Individual Runs and Systemic Crises Excessive Risk Taking The Need of Regulation Competition in Banking Competition Under Asymmetric Information Competition and Switching Costs Competition and Networks Competition and Stability: A Positive or a Negative Link? Market Structure and Financial Fragility Market Structure and Risk Taking 470 i>,

9 xii Contents 5. Competition and Regulation Conclusion 479 References Competition and Regulation in the Banking Sector: A Review of the Empirical Evidence on the Sources of Bank Rents 483 Hans Degryse and Steven Ongena (CentER, Tilburg) 1. Introduction Measuring Banking Competition Traditional Industrial Organization New Empirical Industrial Organization Competition: Conduct and Strategy Market Structure and Conduct Market Structure and Strategy: Product Differentiation and Network Effects Switching Costs Evidence on the Existence, Magnitude, and Determinants of Switching Costs Switching Costs and Conditions: Relationships as a Source of Bank Rents? Market Structure and Market Presence: Bank Orientation and Specialization Location Distance Versus Borders Distance and Conditions: Spatial Pricing Distance and Conditions: Availability '-' Distance and Strategy: Branching Borders and Conduct: Segmentation Borders and Strategy: Entry and M&As Regulation Regulation and Market Structure Regulation and Conduct Regulation and Strategy Regulation and Financial Stability and Development Conclusion 540 References 542 Index - 555