Credit

In: Business and Management

Submitted By alinana
Words 9763
Pages 40
Ian W Marsh

The effect of lenders' credit risk transfer activities on borrowing firms' equity returns

Bank of Finland Research
Discussion Papers
31 • 2006

Suomen Pankki
Bank of Finland
P.O.Box 160
FI-00101 HELSINKI
Finland
+ 358 10 8311 http://www.bof.fi Bank of Finland Research
Discussion Papers
31 • 2006

Ian W Marsh*

The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns

The views expressed are those of the author and do not necessarily reflect the views of the Bank of Finland.
* Cass Business School, London, and Bank of Finland. E-mail:
i.marsh@city.ac.uk. This paper was written while the author was visiting the Research Unit of the Bank of Finland. The
Bank’s hospitality was exemplary and I am grateful to participants at the Research Unit’s Summer Workshop, the
Bank of Finland Economics Seminar, Iftekhar Hasan, Tuomas
Takalo, and Wolf Wagner for comments. Susan Yuska at the
Chicago Fed was very helpful in guiding me through the Bank
Holding Company Database.

http://www.bof.fi
ISBN 978-952-462-340-7
ISSN 0785-3572
(print)
ISBN 978-952-462-341-4
ISSN 1456-6184
(online)
Helsinki 2006

The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns
Bank of Finland Research
Discussion Papers 31/2006
Ian W Marsh
Monetary Policy and Research Department

Abstract
Although innovative credit risk transfer techniques help to allocate risk more optimally, policymakers worry that they may detrimentally affect the effort spent by financial intermediaries in screening and monitoring credit exposures. This paper examines the equity market’s response to loan announcements. In common with the literature it reports a significantly positive average excess return – the well known ‘bank certification’ effect. However, if the lending bank is known to…...

Similar Documents

Giving Credit Where Credit Is Duw

...Northcentral University Assignment 3: Giving Credit Where Credit is Due Regina Taylor Contribution to the Field Chapter two and three of the book by Krames (2003) is very enlightening an intuitive. Michael Dell according to Krames (2003) believes in the power of the customer, be it their positive or negative feedback, but especially in what the customer wants from a product (p. 56). Michael Dell birth a business model based solely on a one-on-one relationship with customers is the foundation of his company the Dell Corporation. Andy Grove’s model mandates protection or maximization of sales opportunities so to be prepared for all possibilities of success or failure which he based on Time magazine’s 1997 person of the year Andras Grof paranoid perspective (Only the paranoid survive) (Krames 2003, pp. 66-67). Business partner Moore’s metaphorically likened their organization to that of a three legged stool, if one leg is off balance so is the entire organization (Krames 2003, pp. 137-139). Lastly, Grove named the fear of an organization being on the brink of total failure as a “strategic inflection point” (SIP) which he describes as an organizations face-to-face with massive must change events even to a point of complete organizational failure (Krames, 2003, p. 141). Resistance Comparison Michael Dell organization encountered near death when the brilliance of his technical engineering team and himself put together a massive computer (The Olympic)...

Words: 921 - Pages: 4

Credit

...Essay on Credit What does mean “to be credit wise”? Being credit wise means use rationally the plastic card as well as to understand how to make good credit, and how to avoid different traps. Credits cards help many students to get financial freedom and desirable independence. Each student should use the credit card wisely as lately it helps him/her to reach the goals such as fulfill educational dreams or to buy a car. Credit card monitoring is important things for students that just require some common sense and responsibility. Our Service Can Write a Custom Essay on Credit for You! In fact, there are a lot of tips how to monitor the credit for getting good one. Following them student can easily prevent all possible trouble situations. Here are some of them: 1. Student should develop reasonable budget for each month, be thrifty and be able to stretch the money. 2. Student should not delay with bills payment. All the bills must be paid on time as in other case even one late payment can negatively impact on the student’s credit score. 3. If the student experiences some problems with bills payment, he/she should immediately provide the creditors with the changes. Student must keep in mind that this is his/her responsibility to inform the creditors about the changes. 4. The minimization of the card debt is also very useful in the student’s case. It is better not to exceed 30% of the available credit limit. 5. Charging more on the student’s card than the......

Words: 481 - Pages: 2

Giving Credit Where Credit Is Due

...Giving Credit Where Credit is Due Foundations for Doctoral Study in Business (BTM7107-8) Ransford Addo Northcentral University Dr. Francis Maffei lll Introduction This research identifies two business professionals, Michael Dell and Andy Grove; their main contributions to their fields; the resistance that each encountered in presenting and furthering their programs; the similarities and differences in their stories; and finally, the factors that may have impacted their success. Michael Dell Michael Dell is founder and CEO of Dell Corporation, a fortune 500 company which was the number one stock of the 1990s, soaring almost 90,000 percent (Krames, 2003, p. 58-59). Dell discovered his entrepreneurial abilities early in life when at 12 years, he issued his first product catalog, the Dell Stamps (Krames, 2003, p. 58). Dell has contributed positively to the technological industry by not only building computers, but also showcasing his outstanding entrepreneurial abilities. Through mass customization, Dell revolutionized the industry. According to Draft (2013), “mass customization refers to using mass-production technology to quickly and cost-effectively assemble goods that are uniquely designed to fit the demands of individual customers” (p. 31). Mass customization enabled Dell to achieve significant savings by eliminating intermediaries. Through customer segmentation, Dell was able to determine the......

Words: 891 - Pages: 4

Credit

...4 Demand for Credit: Companies demand credit for various operating, investing and financing activities. Operating activities – many companies have cyclical operating cash needs. For example, manufacturers of inventory or retailers that purchase merchandise for the end of year holiday season. Investing activities – companies routinely require large amounts of cash for investments including purchases of new equipment and property and for corporate acquisitions. Important for start-ups and growth companies. Financing activities – for issuance of debt for repayment of maturing debt obligations or the repurchase of common stock. Supply of Credit: Trade credit – from supplies is routine and most often non-interest bearing. Bank loans – banks structure financing to meet specific client needs. Bank regulators require that banks hold capital in proportion to their loan portfolio. Revolving credit lines – loans that companies draw on as needed. They are like credit cards because a company can take cash out as needed and make payments as cash is available. Lines of credit – are guarantees that funds will be available when needed. These LOC act as backup or interim financing. Letters of credit – facilitate private international transactions. A letter of credit interposes a bank between the two parties to a transaction. The letter provides a guarantee of payment from the buyer. The benefit is that is substitutes the bank’s credit rating for......

Words: 284 - Pages: 2

Credit

...different organizations and pertinent publications. A two-limit tobit regression model was employed to identify factors influencing loan repayment and intensity of loan recovery among smallholder farmers. A total of 14 explanatory 431 International Journal of Economics, Business and Finance Vol. 1, No. 11, December 2013, PP: 431- 446, ISSN: 2327-8188 (Online) Available online at http://ijebf.com/ variables were included in the empirical model and out of these, six variables were found to be statistically significant. These are total land holding size of the family (hectare), total livestock holding (TLU), expenditure on social festivals, number of years of experience in agricultural extension services, purpose of borrowing and source of credit. Regarding the sign of the significant variables, expenditure on social festivals has a negative and significant effect on loan recovery rate while the remaining five variables have a significant and positive effect. Variance inflation factor were calculated to detect multicollinearity and association among all explanatory variables. Therefore, consideration of factors affecting loan repayment performance is vital because it provides information that would enable to undertake effective measures with the aim of improving loan repayment performance and hence helped lenders such as microfinance institution, nongovernmental organization and policy makers to have knowledge as to where and how to channel efforts to minimize loan defaults.......

Words: 7778 - Pages: 32

Credit

...Building Good Credit Today, parents are unsure on when and how they can guide their teens to start building up their credit. First, they need to encourage their teens to get a job. Second, parents need to talk to their teens about saving techniques and opening up their own bank accounts. Third, teens should apply for a credit card for themselves; if not possible then become an authorized user on their parents’ credit cards. Fourth, teens need to be aware that the more inquires they make for credit cards; the more that it can hurt their credit. Fifth, teens need to understand that they need to pay their bills on time or suffer the consequences. Finally, teens need to use their credit card wisely and responsible in order to build their credit. It is wise for parents to encourage their teens to withhold a job. When teens are working for their own money they tend to be more cautious towards spending it. Without their own income, they will expect their parents to continue paying for everything” (Todorova). Law requires credit card issuers to check income for applicants under age 21.”  Credit card issuers do such things to assure themselves that the teen will be able to repay their credit card balances. The next step in guiding teens to build up their credit is for parents to have a mature talk about money saving techniques and opening up their own bank account. “Establishing a good banking history can help your child build a strong financial foundation, which is a stepping......

Words: 818 - Pages: 4

Credit

...Credit Card Use September 15, 2010 The article I found about interest rates is called “Credit Where It’s Due.” This article talks about credit unions and how they offer lower rates and how they are becoming more popular. This article states that more people are looking into credit unions because of lower interest rates and higher savings rates. I think it is relevant to credit card use because if more people saw this article, more people would think about joining these credit unions and receive lower interest rates on credit cards. Article 2 is called “Win at the Credit Scoring Game.” And is about credit reports and ratings. The first thing you need to do is learn your score. They also say that you should never, ever be late on payments. Also always remember the “magic 20%. This 20% is about how much you owe compared to how much credit has been extended to you. This article is relevant to credit card use because it tells you what to do if you spot an error, how to improve your score. All the things that people should realize if they have a credit card. The article that I found is about money management and is called “5 East Cost Cutting Tips”. It includes things like to stop paying credit card interest rates, get a better price no Internet service, slash cell phone costs, reconsider landlines, and reducing bank fees. This article gives you all the ways you can cut and how to do each. This article is relevant to the topic of credit card use because it shows you......

Words: 381 - Pages: 2

Credit

...1. Most credit cards require that you pay a minimum monthly payment of two percent of the balance. Based upon a balance of $5,270.00, what would be the minimum monthly payment (assuming no other fees are being applied)? I found that the minimum payment that I would be making is $104.40 per month because it is two percent of $5,270. 2. Considering the minimum payment you just calculated, determine the amount of interest and the amount that was applied to reduce the principal. Hint: You’ll need to find the total interest for the year first. The total interest for the year would increase my balance of $5,270 to $6,823. If I determine the amount of interest that will go into my monthly payments, then my payments will be $136.46 instead of $104.40. 3. Consider one of your credit cards. What is the balance? How is the minimum monthly payment determined? What would be the minimum payment? How much of the minimum payment goes towards interest? How much of the minimum payment goes towards the principal? If you do not want to share an actual balance or do not have a credit card, calculate these amounts using an imaginary credit card balance. My fake credit card would have a balance of $10,000. The minimum payment per month is determined based on my income. The minimum would be 5% of the $10,000. Two percent of the minimum payment would go towards interest. One percent of the payment would go towards the principle. 4. Now, examine the terms of one of your credit cards......

Words: 605 - Pages: 3

Credit

...& Laman, V.P. (2010)., the birth of the credit system has made the use of the documents covering credit transactions both imperative and important, such documents are known as credit instruments. While credit transaction need not be evidenced by written contract, nevertheless, it appears sufficiently clear that it is better than they are. Credit instruments are documents that serve as an evidence of debt, this defines the responsibility of the debtor to his creditor and the right of the creditor to collect from the debtor at the specified time. Bonds are promises of the payment of interest and principals to the holder at a particular time. It is a written or printed acknowledgment of debt. It is a certificate of liability or obligation. Bonds are debt and are issued for more than one year. Stocks are permanent invested capital contributed by the stockholders or owners of a corporation which are proved by certificates. It is a share of a company held by an individual. Miranda (2001) defined check as a written order drawn by a depositor, directing it to pay on demand a specified sum of money. Check is the most commonly used bill of exchange. It is a written, dated and signed instrument. Promissory note is the simplest form of a credit instrument. It is a written promise of an individual to pay a certain amount of money at certain time in the future to an appointed person or bearer. II. Kinds of credit instruments Credit instrument existed before coinage. In......

Words: 2422 - Pages: 10

Credit Cards

...Final Draft Although there are many advantages of possessing credit cards, most Americans should not use them; because they do not use them properly to where they become liable or subject to overwhelming debt, which could damage their credit history. Personal credit card debt has doubled in the past four years and personal bankruptcies are at the highest ever, and still more Americans are spending money that they do not have. Credit cards allow and encourage individuals to buy more than budgeted, and this is obviously a situation, which is best to avoid. Knowing when it is a bad idea to use a credit card can help you to avoid adding debt to your credit card. It is no doubt that the use of credit cards have eased the rate in which people obtain goods and services, but the use of credit cards have done more damage to the finances of Americans credit card users than good. Credit cards have become a problem for most American credit card users and there are even cases that some Americans have committed suicide because of the heavy debts he or she owes the credit card companies. Should Americans continue using credit cards? The answer is definitely no as the detriment that comes with using credit cards outweighs the benefits. Credit cards are a huge convenience in everyday life, yet most people are irresponsible when using them. The convenience of possessing credit cards increase the risk of overspending because people can convince themselves to spend more than what......

Words: 1136 - Pages: 5

Credit

...University of Phoenix Material Credit History Worksheet Directions Identify the following factor descriptions to their corresponding C of credit. Highlight, bold, or underline the correct answer. 1. Jack and Jill want to buy a car. They are using another car for ___________ as a promise to pay. a) Capacity b) Capital c) Collateral d) Character e) Conditions 2. Under these _______________, you may still be approved with a cosigner. a) Capacity b) Capital c) Collateral d) Character e) Conditions 3. Henry has a history of not staying with a job for an extended period of time. Which of the C’s would a lender be looking at? a) Capacity b) Capital c) Collateral d) Character e) Conditions 4. Madaline is a stay-at-home mom seeking to start a home-based business. She would need a cosigner in order to qualify for a loan. What other C’s might she need for this loan? a) Capacity b) Capital c) Collateral d) Character e) Conditions 5. Lenders use a debt-payment-to-income ratio to evaluate this particular C. a) Capacity b) Capital c) Collateral d) Character e) Conditions Credit Score Resources: • Five C’s web page located at the following link: http://www.loanuniverse.com/credit.html. • Annual Credit Report website www.annualcreditreport.com. • Fair Isaac website......

Words: 820 - Pages: 4

Credit or Not

...benefits? There is! Credit cards and most Americans should use them. It is estimated that 80% of American households have at least one credit card (Fast facts about credit card debt, 2006, para 10.) There are many types of credit cards, allowing anyone to choose the one best suited for his or her needs. Although there are some disadvantages to using credit cards, the advantages outweigh them by far. Most important, using credit cards can help to build credit history, which will allow the user to gain more credit and maintain a good credit score. Many types of credit cards offer perks or rewards and different interest rates (APR). One type of card is a major credit card such as Visa, MasterCard, Discover, and American Express. Each of these may offer rewards or perks such as frequent flyer miles, points for merchandise, travel, car rentals, or cash back. Another type of card is a store or gas station credit card; this type of card is issued by a particular store or gas station. These cards usually come with some sort of a rewards program, helping your dollar go further. For example after spending a certain amount of money, you receive a 10% discount coupon toward a future purchase. Many credit cards offer low interest rates to new members, on balance transfers and to members who keep their account in good standing. However, missing payments or paying them late could result in your interest rate being raised to a higher percentage. Using credit cards can offer......

Words: 1001 - Pages: 5

Credit

...RESEARCH METHODOLOGY Introduction to Credit Appraisal: Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. Problem Statement: To study the Credit Appraisal System in SME sector, at State Bank of India (SBI), Uttarsanda. Objectives: * To study the Credit Appraisal Methods. * To understand the commercial, financial & technical viability of the project proposed & it’s funding pattern. * To understand the pattern for primary & collateral security cover available for recovery of such funds. Research Design: Analytical in nature Data Collection: Primary Data: * Informal interviews with Branch Manager and other staff members at SBI bank. * E-circulars of SBI Secondary Data: * Books and magazines * Database at SBI * Internal reports of the banks * Library research * Websites Expected contribution of the study: This study will help in understanding the credit appraisal system at SBI & to understand how to reduce various risk parameters, which are broadly categorized into financial risk, business risk, industrial risk & management risk associated in providing any loans or advances......

Words: 28662 - Pages: 115

Credit Rish

...Credit risk Credit risk is a fast changing discipline at the leading edge of risk management practice. The recent credit crisis brought into focus the need for effective risk management control and highlighted many of the deficiencies of the banks’ approach to measuring credit risk. This has resulted in many financial institutions reviewing their existing approach to the management of credit risk from a process, organisational and systems perspective. At the same time, many institutions are also continuing to develop more sophisticated methods of risk management, such as measuring and hedging Credit Valuation Adjustments (CVA) and modelling economic capital and incremental risk Definitions of Credit risk: ❖ Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). ❖ Is the risk that another party to an investment transaction will not fulfill its obligations. Credit risk can be associated with the issuer of ❖ The likelihood that an individual will pay his or her credit obligations as agreed. Borrowers who are more likely to pay as agreed pose less risk to creditors and lenders. ❖ Risk of loss that may arise on outstanding contracts should a counter party default on its obligations. ❖ The risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a......

Words: 3836 - Pages: 16

Credit

...the world. Rohit: Yes dude, the job here is amazing, I get to interact with people around the world, investment managers – who want to invest millions of dollars Me: great…so tell me something interesting. What’s your job all about? Rohit: You know there is a great demand for American home loans, which we buy from the U.S. banks. We then convert these into what is called as CDO’s (Collateralized Debt Obligations). In plain English – this refers to buying home loans that banks had already issued to customers, cutting them into smaller pieces, packaging the pieces based on return (interest rate), value, tenure (duration of the loans) – and selling them to investors across the world after giving it a fancy name, such as ‘High Grade Structured Credit Enhanced Leverage Fund’. Me: Wow! I would’ve never guessed that boring home loans could transform into something that sounds so cool! Rohit: hahaha…actually we create multiple funds categorized based on the nature of the CDO packages they contain and investors can buy shares in any of these funds (almost like mutual funds…but called Structured Investment Vehicles or SIV’s) Me: Dude, you make your job sound like a meat shop…chopping and packaging. So, in effect when an investor purchases the CDO’s (or the fund containing the CDO’s), he is expected to receive a share of the monthly EMI paid by the actual guys who have taken the underlying home loans? Rohit: Exactly, the banks from whom we purchased these home loans send us a monthly......

Words: 2208 - Pages: 9