41. Xudong An (SDSU), Yongheng Deng (USC), and Anthony B. Sanders (ASU). 1. Introduction. 42. 2. Structured Financing and the Pooling and Tranching of ...
HANDBOOK OF FINANCIAL INTERMEDIATION AND BANKING Edited by
Anjan V. Thakor Arnoud W. A. Boot
, AMSTERDAM • BOSTON • HEIDELBERG • LONDON NEW YORK • OXFORD • PARIS • SAN DIEGO SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO
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Contents
List of Contributors Preface
xiii xv
Introduction to the Series
Section 1 Design of Contracts and Securities
xxv
1
Overview by Franklin Allen (Pennsylvania)
1
The Design of Debt Contracts
5
Paolo Fulghieri (UNC) and Eitan Goldman (Indiana University, Bloomington)
1. Introduction 2. Debt Contracts and Costly State Verification 2.1. Multiperiod Contracts 2.2. Stochastic Monitoring v 3. Debt Contracts and the Allocation of Control Rights 4. Debt Contracts and the Provision of Incentives 5. Debt Contracts under Asymmetric Information 6. The Structure of Debt Contracts 6.1. Seniority 6.2. Maturity Structure 6.3. Collateral 6.4. The Number of Creditors 7. Concluding Remarks References
2 Subordination Levels in Structured Financing
6 8 11 12 13 17 18 24 24 26 32 34 36 36
41
Xudong An (SDSU), Yongheng Deng (USC), and Anthony B. Sanders (ASU)
1. Introduction 2. Structured Financing and the Pooling and Tranching of Assets
42 43
VI
Contents
3. CMBS Structure 3.1. CMBS Subordination 4. Research Question and Empirical Approach 4.1. The Deal Subordination Regression 4.2. The Chow Test for Structural Change 5. Data 6. Results 6.1. Regression Results 6.2. Structural Change and Chow Tests 7. Conclusion References
44 45 46 47 47 48 51 51 53 58 59
Section 2 Market Structure and Structure of Financial Markets
61
3 Limit Order Markets: A Survey
63
Christine A. Parlour (UCB) and Duane J. Seppi (CMU)
1. Introduction 2. Modeling Limit Orders 2.1. Static Equilibrium Models 2.2. Equilibrium Models with Static Order Choice and a Terminal Penalty 2.3. Dynamic Optimal Control Models for Single Agents 2.4. Multiperiod Equilibrium Models 2.5. Limit Orders and Private Information 3. Market Design 3.1. Competition and Limit Order Markets 3.2. Imperfect Competition 3.3. Dealer Markets 3.4. Welfare 3.5. Robustness 3.6. Transparency 4. Questions for Future Research References
Section 3 Financial Intermediary Structure
64 68 71 73 74 74 82 84 84 87 88 89 90 90 92 93
97
Overview by Mitchell Berlin (FRB Philadelphia)
4 Bank Structure and Lending: What We Do and Do Not Know
107
Philip E. Strahan (Boston College, Wharton, NBER)
1. Introduction
108
Contents
Vll
2. Bank Size and Lending 2.1. Do Large Banks Lend More Than Small? 2.2. Do Large Banks Lend Differently from Small Banks? 2.3. Bank Size, Organization Structure, and Lending 2.4. How Does Bank Size Affect Credit Availability ? 3. Deposit-Lending Synergies 3.1. Do Deposits Make Banks Better Lenders? 3.2. Banks as Liquidity Providers 4. Conclusion References
5 Optimal Industrial Structure in Banking
109 109 Ill 116 117 121 121 123 125 128
133
Loretta J. Mester (FRB Philadelphia, The Wharton School)
1. Introduction and Motivation 2. Efficiency Concepts 3. Empirical Implementation 3.1. Bank Production 3.2. Cost Minimization 3.3. Profit Maximization 3.4. More Complicated Objectives 4. Measurement 4.1. Estimation Techniques O 4.2. Functional Form, Variable Selection, and Variable Measurement 4.3. Special Issues in Banking 5. Empirical Findings in the Literature 5.7. Scale Economies 5.2. Scope Economies 5.3. X-Efficiency 5.4. Productivity 6. Conclusion References
6 Commercial Banks in Investment Banking
134 137 140 140 141 144 145 148 148 150 151 153 153 157 158h 159 160 160
163
Amar Gande (SMU)
1. Introduction 2. Tradeoffs in Combining Lending and Underwriting 2.1. Costs of Combining Lending and Underwriting 2.2. Benefits of Combining Lending and Underwriting 2.3. Theory 2.4. Empirical Evidence from Debt Underwritings 2.5. Empirical Evidence from Equity Underwritings 2.6. Organizational Form of Underwriting
164 168 168 170 171 171 175 178
viii
.
Contents 3. Competitive Effects of Commercial Bank Entry into Securities Underwriting 3.1. Theory 3.2. Empirical Evidence on Commercial Bank Entry in 1989 3.3. Empirical Evidence on the Financial Modernization Act of 1999 4. Conclusion References
Section 4 Mutual Funds
182 182 182 184 186 186
189
Overview by Sudipto Bhattacharya (LSE)
7 Performance Measurement and Evaluation
191
Bruce Lehmann (UCSD) and Allan Timmermann (UCSD)
1. Introduction 2. Theoretical Benchmarks 2.1. Sources of Benchmarks 2.2. A First Pass at Performance Measurement 3. Performance Measurement and Market Timing 3.1. Alternative Models of Market Timing 3.2. Observable Information Signals 4. Performance Measurement and Attribution with Observable Portfolio Weights 4.1. Should Investors Hold Mutual Funds ? 4.2. Determining the Optimal Holdings in Mutual Funds 5. The Cross Section of Managed Portfolio Returns 5.7. Inference in the Absence of Performance Ability 5.2. Power of Statistical Tests for Individual Funds 5.3. Inference for Multiple Funds 5.4. Empirical Specifications of Alpha Measures 6. Bayesian Approaches 6.1. Asset Mispricing and Investment in Mutual Funds 7. Conclusion References
8 The Behavior of Mutual Fund Investors
192 194 197 199 202 205 218 220 229 231 233 234 241 244 247 249 252 255 256
259
Lu Zheng (UCI)
1. Introduction 2. Examining Investor Behavior Using Fund Flows 2.1. Estimating Mutual Fund Flows 2.2. The Decision to Choose Among Mutual Funds 2.3.' Mutual Fund Flows and Aggregate Market Returns 3. Investment Performance of Mutual Fund Investors
260 261 261 262 271 272
Contents
IX
4. Investor Externality 4.1. Liquidity Costs 4.2. Stale-Price Arbitrage 5. Strategies of Mutual Funds 6. Conclusion References
274 275 277 277 280 280
9 Incentives in Funds Management: A Literature Overview
285
Sudipto Bhattacharya (LSE), Amil Dasgupta (LSE), Alexander Guembel (Oxford), and Andrea Prat (LSE)
1. Introduction 2. Theories of Incentives for Fund Managers and Informative Experts 2.1. Principal-Agent Models: Effort Choice, Delegation, and Screening 2.2 Optimal Contracts Based on Verifiable Portfolio Composition Choices and Returns 2.3. Returns-Based and Relative Performance-Based Contracts 2.4. Conformist Trading: The Roles of Career Concerns 2.5. Fund Manager Incentives and Uninformed Trading 2.6. General Equilibrium Implications of Fund Manager Incentives 3. Evidence on the Choices and Rewards of Analysts and Fund Managers 4. Conclusion References ^
288 289 289 290 291 294 297 299 301 303 303
Section 5 Regulation
305
Overview by Mark J. Flannery, University of Florida
10 Consolidation in the U.S. Banking Industry: Is the "Long, Strange Trip" About to End?
'H
309
Kenneth D. Jones (FDIC) and Tim Critchfield (FDIC)
1. Overview of Structural Change in the U.S. Banking Industry 1984-2003 1.1. Industry Size 1.2. Industry Concentration 2. Fundamental Causes of Consolidation 2.1. Environmental Factors . 2.2. Microeconomic Factors in Merger Decisions 3. The Effects of Consolidation 4. Projections of Banking Industry Structure 4.1. Review of Previous Projections and Their Methodologies ' 4.2. New Linear Extrapolations: A Comparison with the Literature 4.3. Beyond Linear Extrapolations 5. Conclusion References
311 311 315 318 318 324 325 333 333 336 338 341 343
Contents
11 Safety, Soundness, and the Evolution of the U.S. Banking Industry
347
Robert DeYoung (Kansas)
1. Introduction 2. The Evolution of the U.S. Banking Industry 2.1. Financial Innovation and Technological Change 2.2. Regulatory Reaction to Financial Innovation and Technological Change 2.3. Widespread Technology Adoption and Industry Transformation 3. A Stylized View of Banking Strategies 3.1. Prederegulation w " 3.2. Postderegulation 4. Evidence Consistent with the Strategic Map 5. Further Implications of Strategic Change 5.1. Industry Structure 5.2. Noninterest Income 5.3. Financial Performance 6. Is the Industry Safe and Sound Today? References
348 349 350 353 353 356 358 358 360 363 363 366 368 369 371
12 What Caused the Bank Capital Buildup of the 1990s?
375
Mark J. Flannery (Florida) and Kasturi P. Rangan (CWRU and HBS) 1. Introduction O 2. Determining a Bank's Optimal Leverage 3. Rising U.S. Bank Capitalization, 1986-2001 3.1. The Supervisors' Focus: Book Capital Ratios 3.2. Investors'Focus: Market Capital Ratios 3.3. BHC Portfolio Volatility and Default Risks 3.4. Possible Causes of the Increased Capitalization 4. Regression Model 4.1. Lags in Adjusting Toward Target Capitalization 4.2. Econometric Issues 4.3. Data 5. Estimation Results 5.7. Decomposing the Change in BHC Capitalization 6. Do Higher Market Ratios Reflect Stricter Regulatory Constraints? 7. Robustness 7.1. Adjust for Possible Safety Net Subsidies in MKTRAT 7.2. Alternative Instrument for BHCs'Realized Stock Return 7.3. Estimates for the 20 Largest Banks 7.4. Estimate for 80 "Next Largest" Banks • 7.5. Excluding the Charter Value Proxy
376 378 381 381 383 384 386 388 390 392 393 395 398 401 404 405 405 405 407 407
Contents
xi 8. Summary and Implications References Appendix Estimating BHC Risk-Weighted Assets (RWA) in the 1986-91 Period
13 Basel II: A Case for Recalibration
407 408 411 411
413
Paul H. Kupiec (FDIC)
1. Introduction 2. A Review of the AIRB Capital Framework 2.1. Discussion 3. The AIRB and Financial Stability 4. Establishing a Sound Benchmark for Risk Measurement Practices 4.1. The Need for Capital for Bank Interest Expenses 4.2. Procyclicality of the AIRB Soundness Standard 4.3. Incorporating Portfolio Interest Income 4.4. Capital for Systematic Risk in PD and LGD 4.5. Random Loss Given Default and "Downturn" LGD 4.6. Asymptotic Portfolio Loss Distribution 4.7. Random Exposures at Default (EADs) 5. Conclusions References o
Section 6 Competition and Regulation in Banking
414 415 418 420 423 423 427 428 430 431 432 436 437 438
441
Overview by Xavier Vives (IESE Business and UPF)
14 Competition and Regulation in Banking Elena Carletti (Frankfurt)
1. Introduction 2. Bank Instability and the Need of Regulation 2.1. Bank Fragility: Individual Runs and Systemic Crises 2.2. Excessive Risk Taking 2.3. The Need of Regulation 3. Competition in Banking 3.1. Competition Under Asymmetric Information 3.2. Competition and Switching Costs 3.3. Competition and Networks 4. Competition and Stability: A Positive or a Negative Link? 4.1. Market Structure and Financial Fragility 4.2. Market Structure and Risk Taking
449 i>,
450 452 452 457 458 461 461 463 464 466 467 470
xii
Contents 5. Competition and Regulation 6. Conclusion References
473 479 479
15 Competition and Regulation in the Banking Sector: A Review of the Empirical Evidence on the Sources of Bank Rents
483
Hans Degryse and Steven Ongena (CentER, Tilburg)
1. Introduction 2. Measuring Banking Competition 2.1. Traditional Industrial Organization 2.2. New Empirical Industrial Organization 3. Competition: Conduct and Strategy 3.1. Market Structure and Conduct 3.2. Market Structure and Strategy: Product Differentiation and Network Effects 4. Switching Costs 4.1. Evidence on the Existence, Magnitude, and Determinants of Switching Costs 4.2. Switching Costs and Conditions: Relationships as a Source of Bank Rents? 4.3. Market Structure and Market Presence: Bank Orientation and Specialization 5. Location 5.1. Distance Versus Borders 5.2. Distance and Conditions: Spatial Pricing 5.3. Distance and Conditions: Availability '-' 5.4. Distance and Strategy: Branching • 5.5. Borders and Conduct: Segmentation 5.6. Borders and Strategy: Entry and M&As 6. Regulation 6.1. Regulation and Market Structure 6.2. Regulation and Conduct 6.3. Regulation and Strategy 6.4. Regulation and Financial Stability and Development 1. Conclusion References
Index
485 488 488 492 499 499 509 510 511 521 527 530 530 531 532 533 533 534 537 537 538 538 539 540 542
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