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Abstract:
This paper looks at the role of commercial banks and investment banks as financial advisors. Unlike some areas of investment banking, commercial banks have always been allowed to compete directly with traditional investment banks in this area. In their role as lenders and advisors, banks can be viewed as serving a certification function. However, banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect. Overall, we find evidence of the certification effect for target firms, but conflicts of interest for acquirers. In particular, the target earns higher abnormal returns when the target's own bank certifies the (more informationally opaque) target's value to the acquirer. In contrast, we find no certification role for acquirers. This may be due to two reasons. First, certification plays less of a role for acquirers because it is the target firm that must be priced in a merger. Second, acquirers predominantly utilize commercial bank advisors in order to obtain access to bank loans that may be used to finance the post-merger transition period. Thus, we find that acquirers tend to choose their own banks (those with prior lending relationships to the acquirer) as advisors in mergers. However, this choice weakens any certification effect and creates a potential conflict of interest because the acquirer's advisor negotiates the terms of both the merger transaction and future loan commitments. Moreover, the advisor's merger advice may be distorted by considerations related to the bank's credit exposure resulting from both past and future lending activity. The market prices these conflicts of interest; we find significantly negative abnormal returns for bank advisors when they advise their own loan customers in acquiring other firms.

Relationship banking, investment bank advisors, commercial bank advisors, certification effect, conflict of interest effect, mergers, acquisitions

Abstract:
This paper looks at the role of commercial banks and investment banks as financial advisors. Unlike some areas of investment banking, commercial banks have always been allowed to compete directly with traditional investment banks in this area. In their role as lenders and advisors, banks can be viewed as serving a certification function. However, banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect. Overall, it is found that, in their merger and acquisition advisory function,the certification effect of commercial banks dominates the conflict of interest effect and that the certification effect is particularly strong when the target s own bank advises merger targets.

Relationship banking, investment bank advisors, commercial bank advisors, certification effect,, conflict of interest effect, mergers, acquisitions

Abstract:
This paper looks at the role of commercial banks and investment banks as financial advisor's. Unlike some areas of investment banking, commercial banks have always been allowed to compete directly with traditional investment banks in this area. In their role as lenders and advisor's, banks can be viewed as serving a certification function. However, banks acting as both lenders and advisor's face a potential conflict of interest that may mitigate or offset any certification effect. Overall, we find evidence of the certification effect for target firms, butconflicts of interest for acquirers. In particular, the target earns higher abnormal returns when the target s own bank certifies the (more information ally opaque) target s value to the acquirer. In contrast, we find no certification role for acquirers. This may be due to two reasons. First, certification plays less of a role foracquirers because it is the target firm that must be priced in a merger. Second, acquirerspredominantly utilize commercial bank advisor's in order to obtain access to bank loans that may be used to finance the post-merger transition period. Thus, we find that acquirers tend to choose their own banks (those with prior lending relationships to the acquirer) as advisors in mergers.However, this choice weakens any certification effect and creates a potential conflict of interest because the acquirer s advisor negotiates the terms of both the merger transaction and future loan commitments. Moreover, the advisor s merger advice may be distorted by considerations related to the bank s credit exposure resulting from both past and future lending activity. The market prices these conflicts of interest; we find significantly negative abnormal returns for bank advisor's when they advise their own loan customers in acquiring other firms.

Relationship banking, investment bank advisors, commercial bank advisors, commercial bank advisors, conflict of interest effect, mergers, acquisitions

Abstract:
This paper looks at the role of both commercial and investment banks in providing merger advisory services. In this area, unlike some areas of investment banking, commercial banks have always been allowed to compete directly with investment banks. In their dual role as lenders and advisors to firms that are the target or the acquirer in a merger, banks can be viewed as serving a certification function. However, banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect. Overall, we find evidence supporting the certification effect for target firms. In contrast, conflicts of interest appear to dominate the certification effect when banks are advisors to acquirers.

In particular, the target earns higher abnormal returns when the target's own bank certifies the (more informationally opaque) target's value to the acquirer. In contrast, we do not find a certification role for acquirers. There are two possible reasons for these different outcomes. First, it is the target firm, not the acquirer, that must be priced in a merger. Second, acquirers predominantly use commercial bank advisors to obtain access to bank loans that may be used to finance the merger. Thus, we find that acquirers tend to choose their own banks (those with prior lending relationships to the acquirer) as advisors in mergers. However, this choice weakens any certification effect and creates a potential conflict of interest because the acquirer's advisor negotiates the terms of both the merger transaction and future loan commitments. Moreover, the advising bank's recommendations may be distorted by considerations related to credit exposure incurred in both past and future lending activity. The market prices these conflicts of interest; we find significantly negative abnormal returns for bank advisors when they advise their own loan customers in acquiring other firms.

relationship banking, investment bank advisors, commercial bank advisors, mergers and acquisitions

Abstract:
We survey both academic and proprietary models to examine how macroeconomic and systematic risk effects are incorporated into measures of credit risk exposure. Many models consider the correlation between the probability of default (PD) and cyclical factors. Few models adjust loss rates (loss given default) to reflect cyclical effects. We find that the possibility of systematic correlation between PD and LGD is also neglected in currently available models.

macroeconomic, systematic risk effects, credit risk exposure, PD, LDG

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 study examines both the quantity and price of risk exposure for different segments of financial intermediaries in order to determine whether market segmentation exists in the financial services industry in the United States. We distinguish between depository institutions, securities firms, insurance companies, mutual funds, and other financial firms using each company s SIC code. We find evidence of market segmentation in both market risk levels and market risk premiums. The results provide little evidence of interest rate risk exposure across all types of financial intermediaries, suggesting the prevalence of hedging programs using interest rate derivatives. However, the market prices interest rate risk exposure differentially by type of financial intermediary. We find that as a market segment, insurance companies were exposed to more interest rate risk particularly in the period late 1980 s to early 1990 s. The interest rate risk premium for banks was among the highest of all financial intermediaries. Overall, we find that securities firms, as a group, have the most market risk exposure, followed in order of descending market beta, by banks, other financial firms, insurance companies, and mutual funds, although the order is reversed when examining the market risk premium. Indeed, we find support for an inverse relationship between the quantity and price for market risk, but not for interest rate risk. When we investigate the impact of two regulatory policy changes, we find that (1) the shift in the conduct of monetary policy towards targeting of monetary aggregates induced banks to take on more market risk, probably due to a decline in their charter value; (2) bank market risk-taking increased further with the introduction of riskbased capital requirements which further reduce charter value for banks; and (3) insurance companies are subject to the highest interest rate risk premiums during the 1988-1994 subperiod, following by commercial banks, probably due to interest rate risk subsidy under the risk-based capital requirements. Overall, during the period 1974-1994, banks increased their market risk exposure despite the tightening of regulatory restrictions, insurance companies increased their interest rate risk exposure over the subperiods. We create synthetic universal banks comprised of portfolios of banks, securities firms, and insurance companies. We find that the synthetic universal banks have significantly positive excess returns, with lower market and interest rate risk exposures and higher expected returns than securities firms.

Abstract:
Using equity returns for financial institutions we estimate both catastrophic and operational risk measures over the period 1973-2001. We find evidence of cyclical components in both the catastrophic and operational risk measures obtained from the Generalized Pareto Distribution and the Skewed Generalized Error Distribution. Our new, comprehensive approach to measuring operational risk shows that approximately two thirds of financial institutions returns represents compensation for operational risk.

operational risk, catastrophic risk, value at risk, extreme value theory, skewed fat tailed distribution

Abstract:
Using equity returns for financial institutions we estimate both catastrophic and operational risk measures over the period 1973-2001. We find evidence of cyclical components in both the catastrophic and operational risk measures obtained from the Generalized Pareto Distribution and the Skewed Generalized Error Distribution. Our new, comprehensive approach to measuring operational risk shows that approximately two thirds of financial institutions returns represents compensation for operational risk.

operational risk, catastrophic risk, value at risk, extreme value theory, skewed fat tailed distribution

Abstract:
Using equity returns for financial institutions we estimate both catastrophic and operational risk measures over the period 1973-2001. We find evidence of cyclical components in both the catastrophic and operational risk measures obtained from the Generalized Pareto Distribution and the Skewed Generalized Error Distribution. Our new, comprehensive approach to measuring operational risk shows that approximately two thirds of financial institutions returns represents compensation for operational risk.

operational risk, catastrophic risk, value at risk, extreme value theory, skewed fat tailed distribution

Abstract:
Using equity returns for financial institutions we estimate both catastrophic and operational risk measures over the period 1973-2003. We find evidence of cyclical components in both the catastrophic andoperational risk measures obtained from the Generalized Pareto Distribution and the Skewed Generalized Error Distribution. Our new, comprehensive approach to measuring operational risk shows that approximately 18% of financial institutions returns represent compensation for operational risk. However,depository institutions are exposed to operational risk levels that average 39% of the overall equity risk premium. Moreover, operational risk events are more likely to be the cause of large unexpected catastrophiclosses, although when they occur, the losses are smaller than those resulting from a combination of market risk, credit risk or other risk events.

operational risk, catastrophic risk, value at risk, extreme value theory, skewed fat tailed distribution

Abstract:
A natural point of departure for all elements of business risk measurement is the past. Future trends and current metrics are often extrapolated from an historical data series. However, this process is fundamentally flawed if there are cyclical factors that impact business measures of risk or performance. Historical data on operational risk gathered during an economic expansion may not be relevant for a period of recession. Estimates of default risk and recovery rates incorporate cyclical components that are correlated to systematic risk factors, such as macroeconomic fluctuations and regulatory shifts. All too frequently, however, researchers and practitioners alike ignore these cyclical factors and blithely extend an unadjusted trend line into the future. The metrics obtained using this methodology are fundamentally flawed. By aggregating across different macroeconomic regimes, these historical estimates do not accurately reflect either time period. It is the goal of this paper to demonstrate the importance of developing models to adjust for systematic and cyclical risk factors in business metrics. This is the first paper, to our knowledge, to test the cyclicality of catastrophic and operational risk measures. Using equity returns for financial institutions we estimate both catastrophic and operational risk measures over the period 1973-2003. We utilize an extreme value approach (Generalized Pareto Distribution, GPD), as well as a generalized distributional approach (Skewed Generalized Error Distribution, SGED) to obtain estimates of catastrophic risk parameters and 1% value at risk (VaR). We find evidence of procyclicality in the catastrophic VaR for financial institutions. We define a new, residual operational risk measure and estimate the risk parameters using both the GPD and SGED. We use these operational risk parameters to determine the 1% operational VaR. Using our measure, we find that operational risk is quite significant, comprising approximately 18% of the total equity returns of financial institutions. This paper presents the first evidence of procyclicality in operational risk measures. Our results are robust to alternative distributional specifications, conditionality in downside risk measures, and simulated databases. Thus, we conclude that macroeconomic, systematic and environmental factors play a considerable role in influencing the risk of financial institutions. Models that ignore these factors are therefore fundamentally flawed. These results provide encouragement for further research into both catastrophic and operational risk measures that are conditioned on cyclical factors.

operational risk, catastrophic risk, value at risk, extreme value theory, skewed fat tailed distribution.

Abstract:
Procyclicality has emerged as a potential drawback to adoption of risk-sensitive bank capital requirements. Systematic risk factors may result in increases (decreases) in bank capital requirements when the economy is depressed (overheated), thereby decreasing (increasing) bank lending capacity and exacerbating business cycle fluctuations. Procyclicality may result from systematic risk emanating from common macroeconomic influences or from interdependencies across firms as financial markets and institutions consolidate internationally. We describe cyclical effects on operational risk, credit risk and market risk measures.

Abstract:
Procyclicality has emerged as a potential drawback to adoption of risk-sensitive bank capital requirements. Systematic risk factors may result in increases (decreases) in bank capital requirements when the economy is depressed (overheated), thereby decreasing (increasing) bank lending capacity and exacerbating business cycle fluctuations. Procyclicality may result from systematic risk emanating from common macroeconomic influences or from interdependencies across firms as financial markets and institutions consolidate internationally. We describe cyclical effects on operational risk, credit risk and market risk measures.

Abstract:
Procyclicality has emerged as a potential drawback to adoption of risk-sensitive bankcapital requirements. Systematic risk factors may result in increases (decreases) in bankcapital requirements when the economy is depressed (overheated), thereby decreasing(increasing) bank lending capacity and exacerbating business cycle fluctuations.Procyclicality may result from systematic risk emanating from common macroeconomicinfluences or from interdependencies across firms as financial markets and institutionsconsolidate internationally. We describe cyclical effects on operational risk, credit risk and market risk measures.

Abstract:
Procyclicality has emerged as a potential drawback to adoption of risk-sensitive bank capital requirements. Systematic risk factors may result in increases (decreases) in bank capital requirements when the economy is depressed (overheated), thereby decreasing (increasing) bank lending capacity and exacerbating business cycle fluctuations. Procyclicality may result from systematic risk emanating from common macroeconomic influences or from interdependencies across firms as financial markets and institutions consolidate internationally. We survey the literature on cyclical effects on operational risk, credit risk and market risk measures.

Operational risk, credit risk, market risk, procyclicality

Abstract:
Conflicts of interest in combining lending with the merger advisement of acquiring firms are found using two separate methodologies. First, commercial banks that advise acquirers with which they have had a prior lending relationship experience a significantly negative abnormal return, averaging 37 basis points over the 3-day period surrounding the merger announcement date. Second, syndicated bank loans that are arranged by the acquirer's advisor after the merger announcement date trade at a significant discount in the secondary market, averaging 4.15%, as compared with syndicated bank loans arranged by banks with no advisory role. Moreover, general-purpose syndicated bank loans originated less than one year after the merger announcement date and arranged by the acquiring firm's advisor trade at an average discount of roughly 12% in the secondary loan market. Since the terms on these general-purpose loans are not set upon merger announcement, they are most subject to risk shifting and underpricing agency problems. These findings offer evidence consistent with the existence of conflicted loans (at below market terms) that are offered by the acquirer's commercial bank advisor in order to win merger advisory business.

Relationship banking, investment bank advisors, commercial bank advisors, certification effect, conflict of interest effect, mergers, acquisitions

Abstract:
To our knowledge, this is the first paper to examine the informational efficiency of the equity market as compared to the syndicated bank loan market. The loan market is a private market comprised of financial institutions with access to private information. We test whether this isreflected in informationally efficient price formation in the loan market vis a vis the equity markets, and reject this private information hypothesis. We find support for a liquidity hypothesis, suggesting that equity markets lead loan markets, despite bank lenders access to private information, because of greater liquidity in equity markets. Only when equity markets arerelatively illiquid do we find evidence supporting the private information hypothesis. Finally, we find evidence of abnormal returns if portfolios are constructed using lagged equity returns todesignate investments in the syndicated bank loan market.

Abstract:
The loan market is a hybrid between a public and a private market, comprised of financial institutions with access to private information about borrowing firms. We test whether this is reflected in informationally efficient price formation in the loan market vis a vis the equity markets, and reject this private information hypothesis. We also reject a liquidity hypothesis which suggests that equity markets always lead loan markets, despite bank lenders' access to private information, because of greater liquidity in equity markets. We further test, and reject, an asymmetric price reaction hypothesis that states that loan returns are more sensitive to negative information whereas equity returns respond symmetrically to both positive and negative information. We find evidence most consistent with an integrated markets hypothesis that suggests that both the equity and syndicated bank loan markets are highly integrated such that information flows freely across markets. This is particularly true when the equity market makers are also loan syndicate members.

Informational efficiency, cointegration, Granger Causality, syndicated bank loans, equity

Abstract:
We examine the information content of quarterly earnings announcements in the syndicated bank loan market, a hybrid public/private debt market that is exclusively comprised of informed institutional participants. In contrast to the literature on equity price reactions to earnings announcements, we find that bank loan returns experience no significant response on earnings announcement dates. However, we do find significant price movements in the secondary loan market four weeks prior to earnings announcement dates, around the time of the monthly covenant reports to members of the syndicate. Moreover, we find that the information content in syndicated bank loan prices is most pronounced for borrowers with predominantly intangible assets that experience declining earnings. Thus, we find evidence that when earnings announcements convey relevant information about the borrowing firm (i.e., for informationally opaque firms with declining creditworthiness), the syndicated bank loan market expeditiously incorporates that information into prices.

Earnings announcements, syndicated bank loans

Abstract:
We document a significant inverse relationship between a firm’s dividend payouts and reliance on bank loan financing. Banks limit dividend payouts to shareholders in order to protect the integrity of their senior claims on the firm’s assets. Moreover, dividend payouts decline in the presence of monitoring by relationship banks, which acts as an effective governance mechanism, thereby reducing the gains from pre-committing to costly dividend payouts. Bank monitoring and corporate governance (insider stake and institutional block holdings) are complementary mechanisms to resolve firm agency problems, both reducing the firm’s reliance on dividend policy.

dividend, bank lending intensity, monitoring, corporate governance

Abstract:
We document a significant inverse relationship between a firm’sdividend payouts and reliance on bank loan financing. Banks limitdividend payouts to shareholders in order to protect the integrity oftheir senior claims on the firm’s assets. Moreover, dividendpayouts decline in the presence of monitoring by relationship banks,which acts as an effective governance mechanism, thereby reducing thegains from pre-committing to costly dividend payouts. Bank monitoringand corporate governance (insider stake and institutional blockholdings) are complementary mechanisms to resolve firm agency problems,both reducing the firm’s reliance on dividend policy.

Abstract:
We examine the impact on market liquidity of the presence of financial intermediaries that are informed and active participants in both the equity and the syndicated bank loan markets. We identify the presence of informationally advantaged lead arrangers of syndicated bank loans that simultaneously act as equity market makers, denoted dual market makers. By employing a two-stage procedure with instrumental variables, we identify the simultaneous equations model of liquidity and dual market maker decisions. We find empirical support for our theoretical model's predictions that the presence of dual market makers improves the liquidity of more competitive equity markets but widens the spread in the less competitive loan market.

syndicated bank loans, joint participation, market liquidity

Abstract:
We survey both academic and proprietary models to examine how macroeconomic and systematic risk effects are incorporated into measures of credit risk exposure. Many models consider the correlation between the probability of default (PD) and cyclical factors. Few models adjust loss rates (loss given default) to reflect cyclical effects. We find that the possibility of systematic correlation between PD and LGD is also neglected in currently available models.

Abstract:
We survey both academic and proprietary models to examine how macroeconomic and systematic risk effects are incorporated into measures of credit risk exposure. Many models consider the correlation between the probability of default (PD) and cyclical factors. Few models adjust loss rates (loss given default) to reflect cyclical effects. We find that the possibility of systematic correlation between PD and LGD is also neglected in currently available models.

Abstract:
We survey both academic and proprietary models to examine how macroeconomic andsystematic risk effects are incorporated into measures of credit risk exposure. Manymodels consider the correlation between the probability of default (PD) and cyclicalfactors. Few models adjust loss rates (loss given default) to reflect cyclical effects. We find that the possibility of systematic correlation between PD and LGD is also neglected in currently available models.

Abstract:
We examine the information content of quarterly earnings announcements in the syndicated bank loan market, a hybrid public/private debt market that is exclusively comprised of informed institutional participants. In contrast to the literature on equity price reactions to earnings announcements, we find that bank loan returns experience no significant response on earnings announcement dates. However, we do find significant price movements in the secondary loan market four weeks prior to earnings announcement dates, around the time of the monthly covenant reports to members of the syndicate. Moreover, we find that the information content in syndicated bank loan prices is most pronounced for borrowers with predominantly intangible assets that experience declining earnings. Thus, we find evidence that when earnings announcements convey relevant information about the borrowing firm (i.e., for informationally opaque firms with declining creditworthiness), the syndicated bank loan market expeditiously incorporates that information into prices.

earnings announcements, syndicated bank loans

Abstract:
Certain nonrecurring circumstances associated with the passage of the Financial ServicesModernization Act of 1999 have created a unique opportunity for the market to obtainbank examination ratings of management quality. We utilize this natural experiment in order to determine how the market views this heretofore private information. We findthat the stock market utilizes bank examination ratings in order to reveal regulatory intent, rather than simply as information about management quality. Revelation of unsatisfactory M ratings (denoted â¬Sbad newsâ¬?) causes BHC stock returns and market risk betas to increase, whereas revelation of acceptable M ratings (â¬Sgood newsâ¬?) causes BHC stock returns and market risk betas to decrease. The market thrives on â¬Sbad newsâ¬? because unsatisfactory M ratings indicate that regulatory intervention is likely to occur, possibly benefiting both shareholders and creditors. On the other hand, revelation of acceptable M ratings (â¬Sgood newsâ¬?) indicates that bank regulators are unprepared to intervene in the near future. Moreover, we find lower bond spreads for a subsample of FHCs with satisfactory M ratings revealed upon conversion.

Abstract:
Certain nonrecurring circumstances associated with the passage of the Financial Services Modernization Act of 1999 have created a unique opportunity for the market to obtain bank examination ratings of management quality. We utilize this natural experiment in order to determine how the market views this heretofore private information. We find that the stock market utilizes bank examination ratings in order to reveal regulatory intent, rather than simply as information about management quality. Revelation of unsatisfactory M ratings (denoted â¬Sbad newsâ¬?) causes BHC stock returns and market risk betas to increase, whereas revelation of acceptable M ratings (â¬Sgood newsâ¬?) causes BHC stock returns and market risk betas to decrease. The market thrives on â¬Sbad newsâ¬? because unsatisfactory M ratings indicate that regulatory intervention is likely to occur, possibly benefiting both shareholders and creditors. On the other hand, revelation of acceptable M ratings (â¬Sgood newsâ¬?) indicates that bank regulators are unprepared to intervene in the near future. Moreover, we find lower bond spreads for a subsample of FHCs with satisfactory M ratings revealed upon conversion.

Abstract:
This paper surveys the literature on the impacts of the Basel Capital Accords on banking market profitability, competitiveness, structure and risk-taking. Special emphasis is applied to the evolution of mortgage markets throughout the world over almost two decades of international bank regulatory policies.

Abstract:
The 1998 passage of the Land Revaluation Law in Japan provided regulatory forbearance to the Japanese banks in the form of a regulatory capital infusion. We test whether this divergence from international bank capital requirements had an impact on Japanese bank lending behavior. Because this natural experiment created an exogenous supply shock, we can utilize it to disentangle demand and supply effects in order to determine the impact on Japanese bank lending in both the US and Japan. We find that the infusion of regulatory capital had no aggregate impact on Japanese bank lending in Japan, but it did change the allocation of loans. Well capitalized Japanese banks shifted their lending from low margin, less capital intensive mortgage lending toward higher yielding, more capital intensive commercial loans. Moreover, we find evidence consistent with a shifting of Japanese bank lending activity away from US lending (which is primarily real estate based) to domestic lending to fund manufacturing. Thus, we find that divergences from international capital standards have significant allocative effects on lending, as well as on bank profitability.

Basel, Land revaluation, International lending, allocative effects, aggregate effects