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Abstract:
Retail loan markets create special challenges for credit risk assessment. Borrowers tend to be informationally opaque and borrow relatively infrequently. Retail loans are illiquid and do not trade in secondary markets. For these reasons, historical credit databases are usually not available for retail loans. Moreover, even when data are available, retail loan values are small in absolute terms and therefore application of sophisticated modeling is usually not cost effective on an individual loan-by-loan basis. These features of retail lending have led to the development of techniques that rely on portfolio aggregation in order to measure retail credit risk exposure. BIS proposals for the Basel New Capital Accord differentiate portfolios of mortgage loans from revolving credit loan portfolios from other retail loan portfolios in assessing the bank s minimum capital requirement. We survey the most recent BIS proposals for the credit risk measurement of retail credits in capital regulations. We also describe the recent trend away from relationship lending toward transactional lending, even in the small business loan arena traditionally characterized by small banks extending relationship loans to small businesses. These trends create the opportunity to adopt more analytical, data-based approaches to credit risk measurement. We survey proprietary credit scoring models (such as Fair, Isaac and SMEloan), as well as options-theoretic structural models (such as KMV and Moody s RiskCalc) and reduced form models (such as Credit Risk Plus).

Abstract:
Retail loan markets create special challenges for credit risk assessment. Borrowers tend to be informationally opaque and borrow relatively infrequently. Retail loans are illiquid and do not trade in secondary markets. For these reasons, historical credit databases are usually not available for retail loans. Moreover, even when data are available, retail loan values are small in absolute terms and therefore application of sophisticated modeling is usually not cost effective on an individual loan-by-loan basis. These features of retail lending have led to the development of techniques that rely on portfolio aggregation in order to measure retail credit risk exposure. BIS proposals for the Basel New Capital Accord differentiate portfolios of mortgage loans from revolving credit loan portfolios from other retail loan portfolios in assessing the bank s minimum capital requirement. We survey the most recent BIS proposals for the credit risk measurement of retail credits in capital regulations. We also describe the recent trend away from relationship lending toward transactional lending, even in the small business loan arena traditionally characterized by small banks extending relationship loans to small businesses. These trends create the opportunity to adopt more analytical, data-based approaches to credit risk measurement. We survey proprietary credit scoring models (such as Fair, Isaac and SMEloan), as well as options-theoretic structural models (such as KMV and Moody s RiskCalc) and reduced form models (such as Credit Risk Plus).

Abstract:
Retail loan markets create special challenges for credit risk assessment. Borrowers tend to be informationally opaque and borrow relatively infrequently. Retail loans are illiquid and do not trade in secondary markets. For these reasons, historical credit databases are usually not availablefor retail loans. Moreover, even when data are available, retail loan values are small in absolute terms and therefore application of sophisticated modeling is usually not cost effective on an individual loan-by-loan basis. These features of retail lending have led to the development of techniques that rely on portfolio aggregation in order to measure retail credit risk exposure. BISproposals for the Basel New Capital Accord differentiate portfolios of mortgage loans from revolving credit loan portfolios from other retail loan portfolios in assessing the bank s minimum capital requirement. We survey the most recent BIS proposals for the credit risk measurement of retail credits in capital regulations. We also describe the recent trend away from relationship lending toward transactional lending, even in the small business loan arena traditionallycharacterized by small banks extending relationship loans to small businesses. These trends create the opportunity to adopt more analytical, data-based approaches to credit risk measurement. We survey proprietary credit scoring models (such as Fair, Isaac and SMEloan), as well as options-theoretic structural models (such as KMV and Moody s RiskCalc) and reduced form models (such as Credit Risk Plus).

Abstract:
Retail loan markets create special challenges for credit risk assessment. Borrowers tend to be informationally opaque and borrow relatively infrequently. Retail loans are illiquid and do not trade in secondary markets. For these reasons, historical credit databases are usually not available for retail loans. Moreover, even when data are available, retail loan values are small in absolute terms and therefore application of sophisticated modeling is usually not cost effective on an individual loan-by-loan basis. These features of retail lending have led to the development of techniques that rely on portfolio aggregation in order to measure retail credit risk exposure. BIS proposals for the Basel New Capital Accord differentiate portfolios of mortgage loans from revolving credit loan portfolios from other retail loan portfolios in assessing the bank's minimum capital requirement. We survey the most recent BIS proposals for the credit risk measurement of retail credits in capital regulations. We also describe the recent trend away from relationship lending toward transactional lending, even in the small business loan arena traditionally characterized by small banks extending relationship loans to small businesses. These trends create the opportunity to adopt more analytical, data-based approaches to credit risk measurement. We survey proprietary credit scoring models (such as Fair, Isaac and SMEloan), as well as options-theoretic structural models (such as KMV and Moody's RiskCalc) and reduced form models (such as Credit Risk Plus).

Abstract:
This paper explores the paradox of bank mergers: on average, bank mergers do not create value yet they continue to occur. Using cross-sectional analysis to examine 56 bank mergers between 1991 and 1995, I test several facets of focus and diversification. The study finds that upon announcement the market rewards the mergers of partners that focus their activities and geography. Long-term efficiency, however, is enhanced when the merger involves a relatively inefficient acquirer and payment is not made solely with cash. Long-term stock performance is further enhanced when the surviving firm does not engage in cross-subsidization. The study suggests market participants correctly realize that focusing mergers create value, but investors may need to rethink the facets of focus they value.

Banks, mergers, cross-sectional analysis

Abstract:
Although domestic mergers and acquisitions (M&As) in the financial services industry have increased steadily over the past two decades, international M&As were relatively rare until recently. This paper uses a novel dataset of over 2,300 mergers that took place between 1978 and 2001 to analyse the determinants of international bank mergers. We test the extent to which information costs and regulations hold back merger activity. Our results suggest that banks operating in more regulated environments are less likely to be the targets of international bank mergers. Hence, the lifting of regulations can spur growth in cross-border bank mergers. Also, mergers tend to be less frequent if information costs are high.

cross-border banking, information costs, regulations, mergers and acquisitions

Abstract:
This paper examines the effects of cross-border bank mergers on the risk and (abnormal) returns of acquiring banks. We find that overall, the acquirers' risk neither increases nor decreases. In particular, on average neither their total risk nor their systematic risk falls relative to banks in their home banking market. The abnormal returns to acquirers are negative and significant, but are somewhat higher when risk increases relative to banks in the acquirer's home country.

Banks, Mergers, Market reaction, International business

Abstract:
Weak bank supervision gives banks the ability to shift risk from themselves to supervisors. One way for banks to take advantage of weak supervisory systems is to engage in risky activities such as cross-border bank mergers. We examine whether the supervisory structure of a country influences the decision to engage in a cross-border merger by looking at the number of such mergers between OECD countries between 1985 and 2001. We also look at the change in risk profile associated with 299 individual mergers. We find that banks expand into countries that provide good business opportunities. However, once a bank decides to expand into a country, the decision to increase or decrease risk appears to be related to its home supervisory structure. Strong supervision - especially fairly priced deposit insurance - appears to mitigate moral hazard.

Banks, international financial markets, regulation

Abstract:
We offer a new explanation for why academic studies typically fail to find value creation in bank mergers. Our conjectures are predicated on the idea that, until recently, large bank acquisitions were a new phenomenon, with no best practices history to inform bank managers or market investors. We hypothesize that merging banks, and investors pricing bank mergers, "learn-by-observing" information that spills over from previous bank mergers. We find evidence consistent with these conjectures for 216 M&As of large, publicly traded U.S. commercial banks between 1987 and 1999. These findings are consistent with semi-strong stock market efficiency.

Mergers, learning, information spillover, banks, market efficiency

Abstract:
Macroeconomic risks could magnify individual bank risk. Mitigating the influence of economy-wide risks on banks could therefore be very important to maintain a smooth-running banking system. In this paper, we explore the extent to which macroeconomic risks affect banks. We use a bank-level dataset on over 2,000 banks worldwide for the years 1995-2002 to study the effect of macroeconomic volatility, the openness of the banking system, and banking regulations on bank risks. Our measure of bank risk is the volatility of banks' pre-tax profits. We find that macroeconomic volatility increases banks' profit volatility and that international openness of the banking system lowers bank risk. We find no impact of banking regulation on profit volatility. Our findings suggest that if policymakers want to lower bank risk, they should seek to lower macroeconomic volatility as well as increase openness in the banking system.

international banking, macroeconomic volatility, banking risk

Abstract:
We investigate whether the introduction of fixed-price U.S. federal deposit insurance increased the risk-taking of banks. We examine 70 financial institutions and find that banks in general became more risky after the introduction of deposit insurance. However, a subset of well-performing banks reduced their risk. Deposit insurance brought about stability in that depositors returned to weaker banks. Although investors did not see deposit insurance as a net subsidy to the banking industry, investors believed deposit insurance would allow smaller banks to compete better against bigger banks. While deposit insurance allowed greater risk-taking among some banks, it also brought more stability and competition within the banking industry.

Banks, Government Policy and Regulation

Abstract:
A link between vaccines and autism is increasingly suspected, because vaccines contain neurotoxins and immune suppressants as well as live viruses that could affect a susceptible population. I investigate the possible link by comparing the proportion of children classified with either autism (AUT) or speech or language impairment (SLI) and the proportion of children who received all recommended vaccines by age two in each U.S. state from 2001 and 2005. I find the higher the proportion of children receiving vaccinations, the higher is the prevalence of children with autism or SLI. I also examine intra-state data for California and Pennsylvania and find a similar association. Finally, I find that states with a greater proportion of completely unvaccinated children also tend to have lower prevalence of autism. The results suggest that autism and speech or language impairments could be side effects of vaccination.

Public health, vaccine policy, economics of vaccines, autism

Abstract:
A link between vaccines and autism is increasingly suspected, because vaccines contain neurotoxins and immune suppressants as well as live viruses that could affect a susceptible population. I investigate the possible link by comparing the proportion of children classified with either autism (AUT) or speech or language impairment (SLI) and the proportion of children who received all recommended vaccines by age two in each U.S. state from 2001 and 2005. I find a higher vaccination rate is associated with a higher prevalence of children with autism or SLI. I also examine intra-state data for California and Pennsylvania and find a similar association. Finally, I find that states with a greater proportion of completely unvaccinated children also tend to have lower rates of autism. The results suggest that autism and speech or language impairments could be side effects of vaccination.

Health, autism, vaccines

Abstract:
This paper examines the effects of cross-border bank mergers on the risk and (abnormal) returns of acquiring banks. We find that overall, the acquirers risk neither increases nor decreases. In particular, on average neither their total risk nor their systematic risk falls relative to banks in their home banking market. The abnormal returns to acquirers are negative and significant, but are somewhat higher when risk increases relative to banks in the acquirer s home country.

Abstract:
This paper examines the effects of cross border bank mergers on the risk and (abnormal)returns of acquiring banks. We find that overall, the acquirers risk neither increases nor decreases. In particular, on average neither their total risk nor their systematic risk fallsrelative to banks in their home banking market. The abnormal returns to acquirers arenegative and significant, but are somewhat higher when risk increases relative to banks in the acquirer s home country.

Abstract:
Non-U.S. bank mergers are becoming an increasingly important part of the worldwide economic landscape. Are the market reactions to non U.S. bank mergers similar to the in the United States? I address this question by examining abnormal returns of publicly traded partners on the announcement of 41 non-U.S. bank mergers and comparing the returns with a U.S. control group. I find acquirers in non-U.S. domestic bank mergers earn more and non-U.S. targets earn less than their U.S. counterparts. However, for the subset of mergers in countries with relatively well developed stock markets, I find that partners earn similar returns.

Abstract:
There is a paradox in bank mergers. On average, bank mergers do not create value, yet they continue to occur. Using cross sectional analysis to examine 54 bank mergers announced between 1991 and 1995, I test several facets of focus and diversification. Upon announcement, the market rewards the mergers of partners that focus their geography and activities and earnings streams. Only one of these facets, focusing earnings streams, enhances long term performance. Two other circumstances improve long term performance: When a merger involves a relatively inefficient acquirer and when partners reduce bankruptcy costs.