• Selected
• Entire List

Abstract:
Microfinance is arguably one of the most effective techniques for poverty alleviation in developing countries. Although traditionally supported by nongovernmental organizations and socially-oriented investors, microfinance institutions (MFIs) have increasingly demonstrated their value on a stand-alone basis, typically exhibiting low default rates combined with attractive returns and growth, encouraging greater commercial involvement. This paper addresses a related issue - whether microfinance shows low correlation with international and domestic market performance measures. If so, it could form the empirical basis for MFI access to capital markets and performance-driven investors in their search for efficient portfolios. Our empirical tests do not show any exposure of microfinance institutions to global capital markets, but significant exposure regarding domestic GDP, suggesting that microfinance investments may have useful portfolio diversification value for international investors, not for domestic investors lacking significant country risk diversification options.

microfinance, systemic risk, poverty alleviation

Abstract:
This paper attempts define reputational risk in financial intermediation and to identify the proximate sources of reputationalrisk facing financial services firms. It then considers the key drivers of reputational risk in the presence of transactions costs and imperfect information in financial markets, surveys empirical research in the literature on the impact of reputational losses imposed on financial intermediaries, and presents some new empirical findings. The paper then develops the link betweenreputational risk and exploitation of conflicts of interest in financialintermediation, arguably one of the most important threats to the reputational capital of financial firms. Finally, it considers some managerial requisites for dealing with both reputational risk and conflicts of interest.

Operational Risk, Reputation, Conflicts of Interest

Abstract:
This paper attempts define reputational risk in financial intermediation and to identify the proximate sources of reputational risk facing financial services firms. It then considers the key drivers of reputational risk in the presence of transactions costs and imperfect information in financial markets, surveys empirical research in the literature on the impact of reputational losses imposed on financial intermediaries, and presents some new empirical findings. The paper then develops the link between reputational risk and exploitation of conflicts of interest in financial intermediation, arguably one of the most important threats to the reputational capital of financial firms. Finally, it considers some managerial requisites for dealing with both reputational risk and conflicts of interest.

Operational Risk, Reputation, Conflicts of Interest

Abstract:
This paper attempts define reputational risk in financial intermediation and to identify the proximate sources of reputational risk facing financial services firms. It then considers the key drivers of reputational risk in the presence of transactions costs and imperfect information in financial markets, surveys empirical research in the literature on the impact of reputational losses imposed on financial intermediaries, and presents some new empirical findings. The paper then develops the link between reputational risk and exploitation of conflicts of interest in financial intermediation, arguably one of the most important threats to the reputational capital of financial firms. Finally, it considers some managerial requisites for dealing with both reputational risk and conflicts of interest.

Operational Risk, Reputation, Conflicts of Interest, Scope Diseconomies in Banking

Abstract:
This paper investigates whether functional diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Based on a U.S. dataset comprising approximately 4,060 observations covering the period 1985-2004, we report a substantial and persistent conglomerate discount among financial intermediaries. Our results suggest that it is diversification that causes the discount, and not that troubled firms diversify into other more promising areas. In addition, the discount applies to all financial services activity-areas with the exception of investment banking and is stable over different combinations of financial activity-areas with the exception of commercial banking units combined with insurance companies and/or investment banking activities.

Diversification, Banking, Organizational structure, Financial sector, Firm valuation

Abstract:
We examine the industrial organization and institutional development of the asset management industry in Asian developing economies - specifically in China, Indonesia, Korea, Malaysia, Singapore, Philippines and Thailand. We focus on the size and growth of the buy-side of the respective financial markets, asset allocation, the regulatory environment, and the state of internationalization of the fund management industry in its key components - mutual funds, pension funds and asset management for high net worth individuals. We link these the evolution of professional asset management in these environments to the development of the respective capital markets and to the evolution of corporate governance. We find that the fund management industry occupies a very small niche in domestic financial systems that are dominated by banks. At the same time, we find that its growth has been very rapid in the early 2000s and we suggest that this is likely to persist as the demand for professional management of financial wealth in the region develops and as the pension fund sectors of the respective economies are liberalized to allow larger portions of assets to be invested in collective investment schemes.

Asset management, Asia financial systems, pension funds, mutual funds, private banking

Abstract:
SUBJECT AREAS: Financial services strategic positioning and execution, industrial organization in financial services, financial conglomerates, European financial sector restructuring, valuation of financial businesses

CASE SETTING: May 2002 US/Europe/Global

This case focuses on broad-gauge strategic positioning and implementation in the global financial services sector. Allianz AG, as summarized in the case, is a major German insurance company with its strongest footprint in the domestic property and casualty business, but also occupying market positions in life and health insurance, and in insurance-type savings products such as variable and fixed annuities as well as reinsurance. With the acquisition of Dresdner Bank AG in April 2001, the firm is also involved in retail and wholesale commercial banking, investment banking and securities brokerage, and is one of the world's largest asset managers. This case focuses on strategic options facing management across clients, products and geographies at the German, European and global levels.

Key questions facing Allianz management going forward are: What kind of strategy? How to implement and market that strategy both inside and outside the firm, particularly to investors? What kinds of strategic positioning and execution alternatives seemed most promising from the perspective of market share, profitability and shareholder value? And what models are there in the financial sector, ranging from multifunctional financial conglomerates like Citigroup to much more focused but global firms like AIG and AXA to local but strong competitive players like Lloyds TSB or Vanguard or Gerling?

Abstract:
This paper examines the financial impact of a transfer of legal sovereignty covering the rights to collateral to an international regime in the case of the Cape Town Convention and Protocol covering international mobile assets, specificallycommercial aircraft and related equipment, which came into force in 2004. We estimate the impact on financing costs facing airlines based in signatory countries in terms of access to financial markets and interest differentials, debt rating migration and stock prices using rating-sensitivity analysis, OLS regressions and event studies. We find that the present value of the resulting financing cost reductions are very significant and are biased in favor ofdeveloping countries, the sources of much of the growth in demand for commercial aircraft going forward. The results suggest the power of changes in the legal framework of financial markets to influence the costs and pricing of global financial flows.

Law and finance, secured lending, aircraft finance, leasing, sovereign risk, asset securitization

Abstract:
This paper examines the financial impact of a transfer of legal sovereignty covering the rights to collateral to an international regime in the case of the Cape Town Convention and Protocol covering international mobile assets, specifically commercial aircraft and related equipment, which came into force in 2004. We estimate the impact on financing costs facing airlines based in signatory countries in terms of access to financial markets and interest differentials, debt rating migration and stock prices using rating-sensitivity analysis, OLS regressions and event studies. We find that the present value of the resulting financing cost reductions are very significant and are biased in favor of developing countries, the sources of much of the growth in demand for commercial aircraft going forward. The results suggest the power of changes in the legal framework of financial markets to influence the costs and pricing of global financial flows.

Law and finance, secured lending, aircraft finance, leasing, sovereign risk, asset securitization

Abstract:
The financial services industry is "special" in a variety of ways, including the fiduciary nature of the business, its role at the center of the payments and capital allocation process with all its static and dynamic implications for economic performance, and the systemic nature of problems that can arise in the industry. So the structure, conduct and performance of the industry has unusually important public interest dimensions. One facet of the discussion has focused on size of financial firms, however measured, and the range of activities conducted by them Is size positively related to total returns to shareholders; If so, does this involve gains in efficiency or transfers of wealth to shareholders from other constituencies, or maybe both; Does greater breadth generate sufficient information-cost and transaction-cost economies to be beneficial to shareholders and customers, or can it work against their interests in ways that may ultimately impede shareholder value as well; And is bigger and broader also safer; This paper starts with a simple strategic framework for thinking about these issues from the perspective of the management of financial firms. What should they be trying to do, and how does this relate to the issues of size and breadth; It then reviews the available evidence and reaches a set of tentative conclusions from what we know so far, both from a shareholder perspective and that of the financial system as a whole.

financial services, shareholders, size of financial firms

Abstract:
We examine the industrial organization and institutional development of the asset management industry in Asian developing economies specifically in China, Indonesia,Korea, Malaysia, Singapore, Philippines and Thailand. We focus on the size and growth of the buy-side of the respective financial markets, asset allocation, the regulatory environment, and the state of internationalization of the fund management industry in its key components mutual funds, pension funds and asset management for high net worth individuals. We link these the evolution of professional asset management inthese environments to the development of the respective capital markets and to the evolution of corporate governance. We find that the fund management industry occupies a very small niche in domestic financial systems that are dominated by banks. At the same time, we find that its growth has been very rapid in the early 2000s and wesuggest that this is likely to persist as the demand for professional management of financial wealth in the region develops and as the pension fund sectors of the respective economies are liberalized to allow larger portions of assets to be invested in collective investment schemes.

Asset management, Asia financial systems, pension funds, mutual funds, private banking

Abstract:
We examine the industrial organization and institutional development of the asset management industry in Asian developing economies - specifically in China, Indonesia, Korea, Malaysia, Singapore, Philippines, and Thailand. We focus on the size and growth of the buy-side of the respective financial markets, asset allocation, the regulatory environment, and the state of internationalization of the fund management industry in its key components - mutual funds, pension funds, and asset management for high net worth individuals. We link the evolution of professional asset management in these environments to the development of the respective capital markets and to the evolution of corporate governance. We find that the fund management industry occupies a very small niche in domestic financial systems that are dominated by banks. At the same time, we find that its growth has been very rapid in the early 2000s and we suggest that this is likely to persist as the demand for professional management of financial wealth in the region develops and as the pension fund sectors of the respective economies are liberalized to allow larger portions of assets to be invested in collective investment schemes.

Abstract:
We investigate whether the diversification discount is simply a proxy for poor corporate governance. We find that the negative value impact of diversification is amplified by adverse governance variables such as low CEO ownership, low board independence, and board classification, and that approximately 25% to 30% of the diversification discount can be attributed to suboptimal governance choices by conglomerate firms. Our methodology includes a dynamic panel GMM estimator that accounts for the endogeneity of the diversification decision and corporate governance, plus an event study analysis of diversifying mergers. Even after controlling for governance, the diversification discount remains negative and significant.

Organizational structure, Diversification, Firm valuation, Corporate governance

Abstract:
The asset management industry represents one of the most dynamic parts of the global financial services sector. Funds under institutional management are massive and growing rapidly, particularly as part of the resolution of pension pressures in various parts of the world. The industry is not, however, well understood from the perspective if industrial organization and international competition, which is the focus of this paper. It begins with a schematic of asset management in a national and global flow-of-funds context, identifying the types of asset-management functions that are preformed and how they are linked into the financial system. It then assesses in some detail the three principal sectors of the asset management industry mutual funds, pension funds, and private-client assets, as well as foundations, endowments, central bank reserves and other large financial pools requiring institutional asset management services. Relevant comparisons are drawn between the United States, Europe, Japan and selected emerging-market countries. This is followed by a discussion of the competitive structure, conduct and performance of the asset management industry, and its impact on global capital markets.

Abstract:
This paper examines the potential for conflicts of interest in the debt ratings business. Inherent in the current business model is the fact that firms whose obligations are rated by the agencies pay fees for those ratings, which in turn comprises virtually all of the revenues of the rating agencies. Given the public nature of the ratings, no other business model seems feasible for rating agencies as commercial ventures, so that conflicts of interest are inherent in this important part of the financial markets infrastructure. This paper examines the nature of this conflict, how it is managed, and the significance of market structure and reputation in preventing conflict exploitation. These issues are linked to the use of ratings for regulatory certification purposes, as well as the international dimensions of debt ratings activity through investments and joint ventures of the major rating groups.

Abstract:
This paper analyzes empirical evidence regarding mergers and acquisitions in the global financial services industry. It examines the global deal-flow during the eleven-year period 1985-95 and generates a global typology of intra- and inter-sectoral M&A transactions among and between banks, insurance companies and securities firms. From these data it identifies financial services as one of the most active industries involved in the global M&A deal-flow. It also identifies the areas of greatest M&A intensity within the world financial services industry. The paper then assesses the motivations for financial services M&A transactions in the context of changed regulatory and competitive factors and evolutions in management objectives emphasizing the pursuit of greater operating efficiencies, enhanced economies of scale and scope and greater market power which executives and boards of directors believe has led (or will lead) to increased shareholder value and competitive performance.

Abstract:
This paper analyzes empirical evidence regarding mergers and acquisitions in the global financial services industry. It examines the global deal-flow during the eleven-year period 1985-95 and generates a global typology of intra- and inter-sectoral M&A transactions among and between banks, insurance companies and securities firms. From these data it identifies financial services as one of the most active industries involved in the global M&A deal-flow. It also identifies the area of greatest M&A intensity within the world financial services industry. The paper then assesses the motivations for financial services M&A transactions in the context of changed regulatory and competitive factors and evolution in management objectives emphasizing the pursuit of greater operating efficiencies, enhanced economies of scale and scope and greater market power which executives and boards of directors believe has led (or will lead) to increased shareholder value and competitive performance.

Abstract:
SUBJECT AREAS: Reputational risk, conflicts of interest, managing financial conglomerates

CASE SETTINGS: United States and global, 2003-05

This case describes professional conduct and conflict of interest problems encountered by Marsh & McLennan Companies (MMC) in its three major business units during 2003-05, and traces the disclosure announcement-effects on the share price. Issues raised include tracking and valuing reputational risk exposures, managing complexity, industry practices and firm-wide strategy.

Abstract:
Microfinance is arguably one of the most effective techniques for poverty alleviation in developing countries. Although traditionally supported by nongovernmental organizations and socially-oriented investors, microfinance institutions (MFIs) have increasingly demonstrated their value on a stand-alone basis, typically exhibiting low default rates combined with attractive returns and growth, encouraging greater commercial involvement. This paper addresses a related issue whether microfinance shows low correlation with international and domestic market performance measures. If so, it could form the empirical basis for MFI access to capital markets and performance-driven investors in their search for efficient portfolios. Our empirical tests do not show any exposure of microfinance institutions to global capital markets, but significant exposure regarding domestic GDP, suggesting that microfinance investments may have useful portfolio diversification value for international investors, not for domestic investors lacking significant country risk diversification options.

microfinance, poverty alleviation, systemic risk

Abstract:
This paper investigates whether geographic diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Our dataset comprises approximately 3,579 observations over the period from 1985 to 2004 and covers the entire range of U.S. financial intermediaries – commercial banks, investment banks, insurance companies, asset managers, and financial infrastructure services firms. We use two alternative measures of geographic diversification: (1) a dummy variable whether the firm reports more than one geographic segment and (2) the percentage of sales from non-domestic operations. Our results indicate that geographic diversification is not associated with a significant valuation discount in financial intermediaries. However, when accounting for the firms’ main activity-areas, we find evidence of a significant discount associated with geographic diversification in securities firms and a premium in credit intermediaries and insurance companies. All these results are robust after taking into account functional diversification of the firms as well as a potential endogeneity of both functional and geographic diversification.

Geographic diversification, Functional diversification, Organizational structure, Financial intermediaries, Firm valuation

Abstract:
This survey paper reviews the basic parameters of strategic positioning and execution in multi-functional financial services firms. We begin with a model of financial intermediation between end-users of the financial system as a way of locating specific financial intermediation functions. Shifts in intermediation shares are superimposed on this flow-of-funds profile, focusing on their implications for alternative business models available to financial institutions. The next section of the paper links the structural story to a normative strategic positioning matrix, which combines standard structure-conductperformance precepts with the potential realization of scale, scope, x-efficiency, marketpower, transaction- and information-cost dimensions, as well as imbedded risk exposures and conflicts of interest. The final section of the paper considers the value of natural hedges incorporated into multifunctional business platforms against the accompanying potential for a conglomerate discount in the share price.

Financial services, Banking, Strategic positioning, Strategic execution

Abstract:
This survey paper reviews the basic parameters of strategic positioning and execution in multi-functional financial services firms. We begin with a model of financial intermediation between end-users of the financial system as a way of locating specific financial intermediation functions. Shifts in intermediation shares are superimposed on this flow-of-funds profile, focusing on their implications for alternative business models available to financial institutions. The next section of the paper links the structural story to a normative strategic positioning matrix, which combines standard structure-conduct performance precepts with the potential realization of scale, scope, x-efficiency, market-power, transaction- and information-cost dimensions, as well as imbedded risk exposures and conflicts of interest. The final section of the paper considers the value of natural hedges incorporated into multifunctional business platforms against the accompanying potential for a conglomerate discount in the share price.

Abstract:
There has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflicts in multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder-impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes - market discipline can leverage the impact of external regulatory sanctions, while improving its granularity though detailed management initiatives applied under threat of market discipline. At the same time, market discipline may help obviate the need for some types of external control of conflict of interest exploitation.

Abstract:
here has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflicts in multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder-impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes market discipline can leverage the impact of external regulatory sanctions, while improving its granularity though detailed management initiatives applied under threat of market discipline. At the same time, market discipline may help obviate the need for some types of external control of conflict of interest exploitation.

Conflicts of interest, Financial regulation, Financial services, Banking

Abstract:
There has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflicts in multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder-impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes market discipline can leverage the impact of external regulatory sanctions, while improving its granularity though detailed management initiatives applied under threat of market discipline. At the same time, market discipline may help obviate the need for some types of external control of conflict of interest exploitation.

Conflicts of interest, Financial regulation, Financial services, Banking

Abstract:
There has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflictsin multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder-impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes market discipline can leverage the impact ofexternal regulatory sanctions, while improving its granularity though detailedmanagement initiatives applied under threat of market discipline. At the same time,market discipline may help obviate the need for some types of external control of conflict of interest exploitation. JEL G21, G24, G28, L14.

Conflicts of interest, Financial regulation, Financial services, Banking

Abstract:
There has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflicts in multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder-impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes market discipline can leverage the impact of external regulatory sanctions, while improving its granularity though detailed management initiatives applied under threat of market discipline. At the same time, market discipline may help obviate the need for some types of external control of conflict of interest exploitation.

Conflicts of interest, Financial regulation, Financial services, Banking

Abstract:
There has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflicts in multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes market discipline can leverage the impact of external regulatory sanctions, while improving its granularity though detailed management initiatives applied under threat of market discipline. At the same time, market discipline may help obviate the need for some types of external control of conflict of interest exploitation.

Conflicts of interest, Financial regulation, Financial services, Banking

Abstract:
We examine the industrial organization and institutional development of the assetmanagement industry in Asian developing economies specifically in China, Indonesia,Korea, Malaysia, Singapore, Philippines and Thailand. We focus on the size and growthof the buy-side of the respective financial markets, asset allocation, the regulatoryenvironment, and the state of internationalization of the fund management industry in its key components mutual funds, pension funds and asset management for high net worth individuals. We link these the evolution of professional asset management inthese environments to the development of the respective capital markets and to theevolution of corporate governance. We find that the fund management industryoccupies a very small niche in domestic financial systems that are dominated by banks. At the same time, we find that its growth has been very rapid in the early 2000s and we suggest that this is likely to persist as the demand for professional management offinancial wealth in the region develops and as the pension fund sectors of the respectiveeconomies are liberalized to allow larger portions of assets to be invested in collective investment schemes.

Asset management, Asia financial systems, pension funds, mutual funds, private banking

Abstract:
management industry in Asian developing economies specifically in China, Indonesia,Korea, Malaysia, Singapore, Philippines and Thailand. We focus on the size and growthof the buy-side of the respective financial markets, asset allocation, the regulatoryenvironment, and the state of internationalization of the fund management industry in itskey components mutual funds, pension funds and asset management for high net worth individuals. We link these the evolution of professional asset management in these environments to the development of the respective capital markets and to theevolution of corporate governance. We find that the fund management industry occupies a very small niche in domestic financial systems that are dominated by banks.At the same time, we find that its growth has been very rapid in the early 2000s and wesuggest that this is likely to persist as the demand for professional management offinancial wealth in the region develops and as the pension fund sectors of the respectiveeconomies are liberalized to allow larger portions of assets to be invested in collective investment schemes.

Asset management, Asia financial systems, pension funds, mutual funds, private banking

Abstract:
Microfinance is arguably one of the most effective techniques for poverty alleviation in developing countries. Although traditionally supported by nongovernmental organizations and socially-oriented investors, microfinance has increasingly demonstrated its value on a stand-alone basis, typically exhibiting low default rates combined with attractive returns, encouraging greater commercial involvement. This paper addresses a related issue whether microfinance represents a distinct financial asset class, thereby forming the basisfor access to global capital markets and performance-driven investors in theirsearch for efficient portfolios. Our empirical tests generally show very lowcorrelations between the performance of microfinance institutions and global andnational market performance measures, suggesting that microfinance portfoliosmay constitute a distinct asset class that can have useful portfolio diversificationvalue.

microfinance, systemic risk, poverty alleviation

Abstract:
This paper considers the generic processes and linkages that comprise financial intermediation - the basic 'financial hydraulics' that ultimately drive efficiency and innovation in the financial system and its impact on real-sector resource allocation and economic growth. Maximum economic welfare demands a high-performance financial system. What does this actually mean? It documents some of the structural changes that have occurred in both national and global financial systems, and suggests how the microeconomics of financial intermediation work. These can have an enormous impact on the industrial structure of the financial services industry and on individual firms. Sequentially, financial channels that exhibit greater static and dynamic efficiency have supplanted less efficient ones. Competitive distortions can retard this process, but they usually extract significant economic costs and at the same time divert financial flows into other venues, either domestically or elsewhere. The paper also examines the consequences of this process in terms of financial sector reconfiguration, both within and between the four major segments of the industry (commercial banking, securities and investment banking, insurance, and asset management) as well as within and between national financial systems. Finally, the paper superimposes key regulatory overlays onto the basic economics and facts of reconfiguration in financial intermediation. This is a 'special' industry, due both to the imbedded systemic risks and its fiduciary nature. Balancing financial efficiency against stability and fairness is not easy. The economics of financial intermediation are highly regulation-sensitive, so small changes in regulation can create important changes in markets. Regulators inevitably make some mistakes, and regulatory mandates are unusually contentious and vulnerable to entrenched economic interests. This is also a discussion of the linkages between structural change in financial intermediation and supervisory and regulatory functions, including some comparisons between US and European legacies and prospects.

Abstract:
This paper considers the generic processes and linkages that comprise financialintermediation the basic financial hydraulics that ultimately drive efficiency and innovation in the financial system and its impact on real-sector resource allocation and economic growth. Maximum economic welfare demands a high-performance financialsystem. What does this actually mean? It documents some of the structural changes thathave occurred in both national and global financial systems, and suggests how themicroeconomics of financial intermediation work. These can have an enormous impact onthe industrial structure of the financial services industry and on individual firms.Sequentially, financial channels that exhibit greater static and dynamic efficiency havesupplanted less efficient ones. Competitive distortions can retard this process, but theyusually extract significant economic costs and at the same time divert financial flows into other venues, either domestically or elsewhere. The paper also examines the consequences of this process in terms of financial sector reconfiguration, both within and between the four major segments of the industry (commercial banking, securities and investment banking, insurance, and asset management) as well as within and between national financial systems. Finally, the paper superimposes key regulatory overlays onto the basic economics and facts of reconfiguration in financial intermediation. This is a special industry, due both to the embedded systemic risks and its fiduciary nature. Balancing financial efficiencyagainst stability and fairness is not easy. The economics of financial intermediation arehighly regulation-sensitive, so small changes in regulation can create important changes inmarkets. Regulators inevitably make some mistakes, and regulatory mandates are unusually contentious and vulnerable to entrenched economic interests. This is also a discussion of the linkages between structural change in financial intermediation and supervisory and regulatory functions, including some comparisons between US and European legacies and prospects.

Abstract:
This paper reexamines the separation of commercial and investmentbanking in the context of modern wholesale financial environment, dominated by a small cohort of “systemic” institutions. Thepaper traces the pathology of regulation and deregulation from the watershed events of the 1930s to the systemic financial failures of the recent past. It then considers the structure, conduct and performance ofthe wholesale financial industry and how firms that cannot be allowed to collapse get that way. Based on the industrial organization of global wholesale finance, the paper then examines the available regulatory techniques, and makes some judgments as to their relative promise in promoting future financial stability with least possible dislocation of financial efficiency, proposing benchmarks for the calibration of proposals for regulatory reform. The paper then evaluates functional separation and carve-outs of high-risk activities that cannot defensibly be conducted within systemic financial firms in the real world of power politics and regulatory capture. The paper concludes that blanket condemnation of the functional-separation features of the 1930s financial reforms is unwarranted in the light of ongoing experience, and that it is time to revisit this issue in reconfiguring the global wholesale financial architecture.

Abstract:
This paper reexamines the separation of commercial and investment banking in the context of modern wholesale financial environment, dominated by a small cohort of “systemic” institutions. The paper traces the pathology of regulation and deregulation from the watershed events of the 1930s to the systemic financial failures of the recent past. It then considers the structure, conduct and performance of the wholesale financial industry and how firms that cannot be allowed to collapse get that way. Based on the industrial organization of global wholesale finance, the paper then examines the available regulatory techniques, and makes some judgments as to their relative promise in promoting future financial stability with least possible dislocation of financial efficiency, proposing benchmarks for the calibration of proposals for regulatory reform. The paper then evaluates functional separation and carve-outs of high-risk activities that cannot defensibly be conducted within systemic financial firms in the real world of power politics and regulatory capture. The paper concludes that blanket condemnation of the functional-separation features of the 1930s financial reforms is unwarranted in the light of history or recent experience, and that virtually all defensible reform options are likely to lead to favor financial specialists at the expense of financial conglomerates.

Financial regulation, Financial crisis, Glass-Steagall Act, Financial conglomerates, Universal banking, Financial sector reform, Financial architecture, Financial stability

Abstract:
This paper attempts to ascertain whether or not functional diversification is value-enhancing or value-destroying in the financial services sector. Based on a U.S. dataset comprising approximately 4060 observations covering the period 1985-2004, we report a substantial and persistent conglomerate discount among financial intermediaries. Our results suggest that it is diversification that causes the discount, and not that troubled firms diversify into other more promising areas. We also investigate the geographic dimension of diversification as well as the interaction between geographic scope and functional diversification and find that the value-destruction associated with functional diversification is not apparent in geographic diversification. A further finding is that there is a significant premium for the very largest of our sample firms (with total assets above 100bn USD) indicating that there are "too big to fail" guarantees for very large financial conglomerates.

Diversification, Focus, Organizational structure, Financial sector, Firm valuation

Abstract:
This paper examines the potential for conflicts of interest in the debt ratings business. Inherent in the current business model is the fact that firms whose obligations are rated by the agencies pay fees for those ratings, which in turn comprises virtually all of the revenues of the rating agencies. Given the public nature of the ratings, no other business modelseems feasible for rating agencies as commercial ventures, so that conflicts of interest are inherent in this important part of the financial markets infrastructure. This paper examines the nature of this conflict, how it is managed, and the significance of market structure and reputation in preventing conflict exploitation. These issues are linked to the use of ratings for regulatory certification purposes, as well as the international dimensions of debt ratings activity through investments and joint ventures of the major rating groups.

Abstract:
The classic structure-conduct-performance approach to industrial organization centers on three questions. First, why is does an industry look the way it does, in terms of numbers of competitors, market share distribution and various other metrics? Second, how do firms actually compete, in terms the formation of prices, product and service quality, rivalry and collaboration within and across strategic groups, and other attributes of economic behavior? And third, how does the industry perform for its shareholders, its employees, its clients and suppliers, and within the context the system as a whole in terms of its impact on income and growth, stability, and possibly less clearly defined ideas about such things as social equity? In the financial services industry, these same questions have attracted more than the normal degree of attention. The industry is "special" in a variety of ways, including the fiduciary nature of the business, its role at the center of the payments and capital allocation process with all its static and dynamic implications for economic performance, and the systemic nature of problems that can arise in the industry. So the structure, conduct and performance of the industry have unusually important public interest dimensions. One facet of the discussion has focused on size of financial firms, however measured, and the range of activities conducted by them. Exhibit 1 depicts a taxonomy of broad-gauge financial services businesses. What are the strategic opportunities and competitive consequences of deepening and broadening a firmâ¬"s business within and between the four sectors and eight sub-sectors? Is size positively related to total returns to shareholders? If so, does this involve gains in efficiency or transfers of wealth to shareholders from other constituencies, or maybe both? Does greater breadth generate sufficient information-cost and transaction-cost economies to be beneficial to shareholders and customers, or can it work against their interests in ways that may ultimately impede shareholder value as well? And what about the â¬Sspecialness,â¬? notably the industry's fiduciary character and systemic risk -- is bigger and broader also safer? This paper begins with a simple strategic framework for thinking about these issues from the perspective of the management of financial firms. What should they be trying to do, and how does this relate to the issues of size and breadth? It then reviews the available evidence and reaches a set of tentative conclusions from what we know so far, both from a shareholder perspective and that of the financial system as a whole.

Abstract:
The classic structure-conduct-performance approach to industrial organization centers on three questions. First, why is does an industry look the way it does, in terms of numbers of competitors, market share distribution and various other metrics? Second, how do firms actually compete, in terms the formation of prices, product and service quality, rivalry and collaboration within and across strategic groups, and other attributes of economic behavior? And third, how does the industry perform for its shareholders, its employees, its clients and suppliers, and within the context the system as a whole in terms of its impact on income and growth, stability, and possibly less clearly defined ideas about such things as social equity? In the financial services industry, these same questions have attracted more than the normal degree of attention. The industry is "special" in a variety of ways, including the fiduciary nature of the business, its role at the center of the payments and capital allocation process with all its static and dynamic implications for economic performance, and the systemic nature of problems that can arise in the industry. So the structure, conduct and performance of the industry has unusually important public interest dimensions. One facet of the discussion has focused on size of financial firms, however measured, and the range of activities conducted by them. Exhibit 1 depicts a taxonomy of broad-gauge financial services businesses. What are the strategic opportunities and competitive consequences of deepening and broadening a firm s business within and between the four sectors and eight sub-sectors? Is size positively related to total returns. to shareholders? If so, does this involve gains in efficiency or transfers of wealth to shareholders from other constituencies, or maybe both? Does greater breadth generate sufficient information-cost and transaction-cost economies to be beneficial to shareholders and customers, or can it work against their interests in ways that may ultimately impede shareholder value as well? And what about the gspecialness, h notably the industry\'s fiduciary character and systemic risk -- is bigger and broader also safer? This paper begins with a simple strategic framework for thinking about these issues from the perspective of the management of financial firms. What should they be trying to do, and how does this relate to the issues of size and breadth? It then reviews the available evidence and reaches a set of tentative conclusions from what we know so far, both from a shareholder perspective and that of the financial system as a whole.

Abstract:
In their historical development, organizational structure, and strategic direction, universal banks constitute multi-product firms within the financial services sector. Certainly within their home environments, universal banks effectively target most or all client-segments, and make an effort to provide each with a full range of the appropriate financial services. Outside the home market, they usually adopt a narrower competitive profile, in the majority of cases focusing on wholesale banking and securities activities as well as international private banking occasionally building a retail presence in foreign environments as well.

Abstract:
In their historical development, organizational structure, and strategic direction, universal banks constitute multi-product firms within the financial services sector. Certainly within their home environments, universal banks effectively target most or all client-segments, and make an effort to provide each with a full range of the appropriate financial services. Outside the home market, they usually adopt a narrower competitive profile, in the majority of cases focusing on wholesale banking and securities activities as well as international private banking occasionally building a retail presence in foreign environments as well.

Abstract:
This is the first exploratory field study of the U.S. inter-dealer OTC corporate bond market. We do this by analyzing the trades of a major bond dealer and through interviews with personnel at the trading desk of this dealer. We document the competitive structure of the market in terms of the number of active dealers, the mechanism used to facilitate trades etc. We find that the mechanism of trading closely resembles a first price sealed bid auction. The number of active dealers is quite small - only 9 dealers account for a large fraction of the trades. We examine potential differences between different segments of the market. We develop a measure of competition for this bidding market based on the theory of auctions. This is the difference between the best and second best bid in a given trade. Our measure of competition indicates that competition is highest in US investment grade corporate bonds and lowest in junk bonds. We also examine the effect of size of the trade on this measure of competition. Surprisingly, large trades do not suffer from any adverse market impact. Lastly, we examine the effect of exclusion of individual bidders on the level of competition. The effect does not appear very large.

Abstract:
This paper examines the financial impact of a transfer of legal sovereignty covering the rights to collateral to an international regime in the case of the Cape Town Convention and Protocol covering international mobile assets, specificallycommercial aircraft and related equipment, which came into force in 2004. Weestimate the impact on financing costs facing airlines based in signatory countries in terms of access to financial markets and interest differentials, debt rating migration and stock prices using rating-sensitivity analysis, OLS regressions and event studies. We find that the present value of the resulting financing cost reductions are very significant and are biased in favor ofdeveloping countries, the sources of much of the growth in demand for commercial aircraft going forward. The results suggest the power of changes in the legal framework of financial markets to influence the costs and pricing of global financial flows.

Abstract:
This paper examines the financial impact of a transfer of legal sovereignty covering the rights to collateral to an international regime in the case of the Cape Town Convention and Protocol covering international mobile assets, specificallycommercial aircraft and related equipment, which came into force in 2004. Weestimate the impact on financing costs facing airlines based in signatory countries in terms of access to financial markets and interest differentials, debt rating migration and stock prices using rating-sensitivity analysis, OLS regressions and event studies. We find that the present value of the resulting financing cost reductions are very significant and are biased in favor ofdeveloping countries, the sources of much of the growth in demand for commercial aircraft going forward. The results suggest the power of changes in the legal framework of financial markets to influence the costs and pricing of global financial flows.

Law and finance, secured lending, aircraft finance, asset securitization

Abstract:
This paper assesses the efforts to â¬Sclean upâ¬? financial markets and corporate governance practices in the wake of the bankruptcies and scandals of the early 2000s. It begins by reviewing what actually happened during that period, what damages ensued and the responses of government enforcement agencies andpolicy makers, then assesses the impact of the various actions that followed andtheir effectiveness. The paper then looks at these actions in an historical context,examining the possibilities of imbalances of power between market insiders andordinary investors that provide an uneven market environment. Finally, itdiscusses actions that might be taken to have a greater impact on leveling the uneven market, and what might be expected in the way of altered governance practices for the future.

Abstract:
Launching of the euro at the beginning of 1999 will accelerate reconfiguration of the financial intermediation process in Europe -- a process that is already well underway -- with dramatic consequences for commercial banking, investment banking, insurance and asset management functions. Banks, insurance companies and other financial intermediaries face strategic choices, to be weighed with great care. This paper begins with a series of suppositions - essentially maximum-likelihood state-variables relating to financial system conditions in the euro-zone, assuming a five-year time horizon. These suppositions set the framework for a discussion of strategic positioning and implementation on the part of financial services firms expecting to compete successfully in the euro-zone. We focus on the institutional microstructure of the financial intermediation process and the determinants of competitive performance. This is followed by an assessment of strategic options facing financial firms in the euro-zone, and alternative institutional outcomes from the perspective of efficiency and stability of the euro-zone financial system. Where appropriate, comparisons are drawn with the U.S. financial system, which has operated under a single currency and since 1865. The final section of the paper provides some strategy and policy indications for the future.

Abstract:
The Mexican financial crisis of late 1994 and early 1995 resulted in a linked collapse of stock market values in almost all developing countries, regardless of economic policies or performance. The contagion effect was clear, and much commented on, if not fully explainable by either theory or past experience. Other Latin American equity markets, being close to ground zero, universally declined by 15% to 30% in less than a month. So did markets in Asia, where price indexes in Hong Kong, Singapore, Taipei, Seoul and Bangkok dropped 10% to 15% in a matter of days. Markets in Poland, Hungary and the Czech Republic were off by similar amounts.

Abstract:
The Mexican financial crisis of late 1994 and early 1995 resulted in a linked collapse of stock market values in almost all developing countries, regardless of economic policies or performance. The contagion effect was clear, and much commented on, if not fully explainable by either theory or past experience. Other Latin American equity markets, being close to ground zero, universally declined by 15% to 30% in less than a month. So did markets in Asia, where price indexes in Hong Kong, Singapore, Taipei, Seoul and Bangkok dropped 10% to 15% in a matter of days. Markets in Poland, Hungary and the Czech Republic were off by similar amounts. These developments raise three important questions of interest to international investors and governments of emerging market countries alike, which we address in this article: (1) What caused the investment surge to begin, and to end? (2) Does this mean a longer-term erosion of investor interest in emerging markets? (3) If so, what are the implications for the new and widely cheered thinking about economic development being the just reward for drastic policy changes towards free markets and sound money, thinking that today is referred to as the "Washington Consensus?" The answers are of fundamental importance to the economic development process, and to the process of global capital allocation. In this paper, we take the view that the emerging market investment boom was not so much ill founded as it was excessive. As Paul Krugman has pointed out, the surge of investments into these markets had many characteristics of a tulip bulb mania, that is, the prices got out of line with reality. Now the market has had its reality check and will not behave foolishly again. Capital flows to emerging market countries will continue but these will have to be earned, not only by the continuation of determined policies intended to expedite market economies, but also in competition with other countries seeking to do the same. This is a process of succeeding in a competitive environment, something that many developing countries have not been overly concerned about in the past. The recent surge on money flows into these countries, and out again, has left behind some lessons which those countries intent on real economic progress in the future will have to master.

Abstract:
Microfinance is arguably one of the most effective techniques for poverty alleviation in developing countries. Although traditionally supported by nongovernmental organizations and socially-oriented investors, microfinance institutions (MFIs) have increasingly demonstrated their value on a stand-alone basis, typically exhibiting low default rates combined with attractive returns and growth, encouraging greater commercial involvement. This paper addresses a related issue whether microfinance shows low correlation with internationaland domestic market performance measures. If so, it could form the empirical basis for MFI access to capital markets and performance-driven investors in their search for efficient portfolios. Our empirical tests do not show any exposure of microfinance institutions to global capital markets, but significant exposure regarding domestic GDP, suggesting that microfinance investmentsmay have useful portfolio diversification value for international investors, not fordomestic investors lacking significant country risk diversification options.

microfinance, poverty alleviation, systemic risk

Abstract:

SUBJECT AREAS: Private banking, asset management, competitive strategy in financial services, international banking
CASE SETTING: 2000, banking, Global


Private banking involves the provision of a highly attractive value-chain of financial and related services to high net worth clients, both within the country of residence and offshore. This value-chain is sufficiently lucrative - to banks, broker-dealers, asset management companies, insurance companies and other financial services firms ranging from specialists to universals and financial conglomerates - to place it high on the strategic priority list of many domestic and global financial services players. At the same time, competing effectively in this sector is not easy, and has changed dramatically over the years. This case focuses on the undisputed leader in the industry, UBS AG of Switzerland, which in 2000 had a greater volume of private-client assets under management than any other financial institution. The case considers strategic positioning and execution in this part of the financial services industry in the light of growing competition and the changing nature of individual wealth. Teaching note available.

Abstract:

SUBJECT AREAS: Financial conglomerates. Universal Banking. Bank regulation and supervision.
CASE SETTING: United States and global, 1998.

REQUESTS FOR COPIES: To receive a copy of this case please contact Ms. Ann Rusolo, Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012, Phone: (212) 998-0703, Fax: (212) 995-4220, E-Mail: MAIL TO: arusolo@stern.nyu.edu


This case deals with the largest merger in history - the 1998 announcement of Citicorp and Travelers, Inc. to create the world's largest financial services firm. It considers the public policy issues surrounding the merger, and the value of "multifunctional financial conglomerates" (MFCs) to shareholders by focusing on possible value-creating and value-destroying aspects combination of the two firms. (Teaching note available to instructors only.)

Abstract:

SUBJECT AREAS: Global asset management. Pension funds and mutual funds. Strategy in the asset management industry.
CASE SETTING: United States, 1997.

REQUESTS FOR COPIES: To receive a copy of this case please contact Ms. Ann Rusolo, Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012, Phone: (212) 998-0703, Fax: (212) 995-4220, E-Mail: MAIL TO: arusolo@stern.nyu.edu


This case addresses the investment management industry, seeking to understand the industry's economics and how one of the industry's most prominent firms is run. The students are asked to answer the question, "what does it take to be successful in this business, and to keep it up?"

Abstract:
The objective of this paper is to identify problems of market-access in the securities industry, to consider the adequacy of the approaches taken under regional and global financial services liberalization negotiations, and to suggest residual market-access issues that remain to be addressed.Part 1 of the paper places the securities industry in the context of the financial intermediation process, explaining the dynamics of that process and its impact on the securities industry and their international dimensions, including the volume and location of transactions-flows, and reviews available evidence on the apparent performance of firms home-based in various countries. Part 3 surveys the role of financial regulation, and evidence regarding explicit and implicit barriers to market access faced by securities firms, and the extent to which these have been addressed in both regional and global trade liberalization efforts.

Abstract:
In this paper, we examine the barriers posed to European financial market integration by imperfections and frictions relating to the clearance and settlement of equity trades. We first examine the economics of clearance and settlement services, especially issues relating to the competitive structure of the market for such services. We use examples from the clearance and settlement "industry" in the European equity market. This is followed by an examination of the relative importance of the competitive structure of the clearance and settlement industry relative to other clearance and settlement frictions that pose costs in the context of European equity market integration. We provide some empirical evidence on settlement efficiency, and analyse the impact of greater (lesser) degrees of CSD service integration on different agents (institutions, issuers, investors etc.)

Abstract:
SUBJECT AREAS: Country risk, cross-border exposure management, Mexico, tequila effect, financial crises.

CASE SETTING: 1995, manufacturing, Mexico.

The purpose of this case is to convey an understanding of the cross-border economic, political and financial risks faced by companies doing business in emerging markets under high-stress conditions. Diagnosis of sources of risk and return and their pricing, interaction between country risk and firm-specific risk, and the interaction between macroeconomic policy and its microeconomic consequences can be discussed using this case. The case focuses on the pathology of the Mexican situation between the time of the 1982 debt crisis and the Tequila crisis of 1994-95.

Students should use the tools of open-economy macroeconomics to diagnose how the country got back into trouble after a sterling track record following the Brady Plan debt workout.

The first dimension of the case considers the open-economy macropolicy framework. What was Mexico doing right? Mexico was widely praised for conforming to the "Washington Consensus" of market liberalization, privatization, responsible monetary policy, highly responsible fiscal policy, etc. What went wrong? Unwillingness to deal with a deteriorating fiscal and monetary picture that included upward pressure on the real exchange rate, leading to an increasing need for external finance, which was done in large part through the issuance of Tesebonos (dollar- indexed, guaranteed-convertible short-term peso securities). Many were purchased by Mexicans and foreign institutional investors, who would liquidate as soon as confidence in policy and in the Peso was shaken. Those fundamentals plus the onset of political crises set off the run and the collapse of the peso and the need for the rescue. The second dimension of the case considers the same issues from a corporate perspective. The near-term aspect deals with the stock and trade of international financial management, setting the probability of loss from foreseeable and unforeseeable events against the cost of insurance. A currency devaluation will hit the balance sheet immediately. In high inflation countries profits are either made or lost by the way the balance sheet is managed. The long-term issue is how operating conditions in Mexico are likely to evolve over the firm's planning horizon.

REQUESTS FOR COPIES: To receive a copy of this case please contact:
Ms. Ann Rusolo, Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012, Phone: (212) 998-0703 Fax: (212) 995-4220 E-Mail: MAILTO:arusolo@stern.nyu.edu

Abstract:
This paper examines recent evidence on the characteristics and pricing of debt securities underwritten by Section 20 subsidiaries of U.S. commercial bank holding companies relative to those underwritten by investment houses. Our results show that Section 20 underwritings of lower-credit rated firms in which the bank has a lending stake, results in relatively higher prices (lower yields). We find no evidence of conflicts of interest in situations where one would expect large conflicts ex-ante, e.g., where the purpose of the bank underwriting is to repay existing bank debt. The results are generally consistent with the view that when banks underwrite debt securities of firms to which they lend (through their commercial banking affiliate) there is a net certification effect present. We also find that Section 20 subsidiaries bring a relatively larger proportion of smaller sized issues to the market than investment houses. Thus, contrary to the contention that greater universal banking powers will stunt the availability of finance to smaller firms we find support for the view that bank underwriting is net beneficial to smaller firms.

Abstract:
A prerequisite for the development of a viable international capital market - one that allows investors to achieve optimum asset-allocation and corporations to tap pools of capital most efficiently - is a supportive transactions infrastructure comprising the clearance, settlement, payment and custody of cross-border securities transactions. This infrastructure is the "plumbing" of the market, a structure that is composed of many different parts that must operate as a seamless and integrated manner in order to achieve maximum efficiency for the end-users of the market (the ultimate buyers and sellers of securities) and thus promote the basic objective, optimum capital allocation. Blockages and discontinuities in the utilities that comprise the transactions infrastructure make themselves felt in the form of increased transaction costs and possibly erosion of market liquidity and transparency. At present Europe, notably the EU, falls far short of having a functional transactions infrastructure for equity securities, and this will remain an important shortcoming as other dimensions of financial integration proceed and as other markets, notably in the United States, compete for European transaction flows. This paper enumerates these barriers and costs and evaluates prospects for alternative models for a high-performance European approach to this issue.