Corporate Governance in Canadian and US Credit Unions

This report, a collaborative effort between the Filene Research Institute and the Credit Union Central of Canada, with participation from the Desjardins Group, follows on two recent governance projects: Tracking the Relationship Between Credit Union Governance and Performance and a three-part series by Professor Robert Hoel about how boards can add more value. Beyond these, the academic literature of corporate governance is well developed, so this study includes an in-depth review of financial institution governance research and calls out the differences between credit unions and other firms. Also, because surveys can only go so far in teasing out insights, the authors followed up with a dozen interviews with credit unions of all sizes across all three major North American credit union systems.

Because the report is survey-based, large swaths of the findings compare major and minor details of different (and often not-so-different) approaches to governance in the three systems and among differently sized credit unions. From those comparisons, some interesting differences emerge. For example, as a federated system, Desjardins excels at some aspects of board development and system governance in ways that the more atomized US and Canadian credit union systems do not.

Irresponsible Lending?: A Case Study of a U.K. Credit Industry Reform Initiative

There are major concerns about the level of personal borrowing, particularly sourced from credit cards. This paper charts the progress of an initiative to create a Responsible Lending Index (RLI) for the credit industry. The RLI proposed to voluntarily benchmark lending standards and promote best practice within the credit industry by involving suppliers of credit, customer representatives and regulators. However, despite initial support from some banks, consumer bodies and the Chair of the Treasury Select Committee, it failed to gain sufficient support from financial institutions in its original format. The primary reasons for this were related to the complexity of building such a robust index and the banks trade body’s fear of exposing its members to public scrutiny. A revised alternative, the Responsible Lending Initiative, was proposed which took into account these concerns. However, the Association of Payment Clearing Service (APACS), the trade body of the credit industry, then effectively destroyed the proposal. This article describes an attempt to address the challenges in the credit card industry with the initiation of the RLI, reflected in stakeholder discourse and in the context of a wider concern expressed by the involved stakeholders in terms of the need for greater responsibility in the banking industry’s lending practices.

An analysis of implied volatility jump dynamics: Novel functional data representation in crude oil markets

The predominant fear in capital markets is that of a price spike. Commodity markets differ in that there is a fear of both upward and down jumps, this results in implied volatility curves displaying distinct shapes when compared to equity markets. The use of a novel functional data analysis (FDA) approach, provides a framework to produce and interpret functional objects that characterise the underlying dynamics of oil future options. We use the FDA framework to examine implied volatility, jump risk, and pricing dynamics within crude oil markets. Examining a WTI crude oil sample for the 2007–2013 period, which includes the global financial crisis and the Arab Spring, strong evidence is found of converse jump dynamics during periods of demand and supply side weakness. This is used as a basis for an FDA-derived Merton (1976) jump diffusion optimised delta hedging strategy, which exhibits superior portfolio management results over traditional methods.

UK Public Private Partnerships and the Credit Crunch: A Case of Risk Contagion?

During the past twenty years, the UK has relied heavily on Public Private Partnerships (PPP) and especially the Private Finance Initiative in the procurement of infrastructure and services. Discussing the causes of the credit crunch and its effects on PPP, this paper notes that the provision of new public sector infrastructure and related services has been adversely affected by the impact of the credit crunch on Private Finance Initiatives (PFIs). These problems have arisen primarily from the unwillingness of commercial banks to replace collapsed PFI bond financing unless new PFI contracts reduce financial risks; which, in turn, is likely to increase the cost of these projects to the public sector. Additional financial strains have arisen for the UK government from the need to bail out collapsed PFI projects. Overall we find evidence that the UK commitment to PFI has not only increased immediate fiscal pressures on the UK when these have become least palatable, but has also created fiscal vulnerabilities at local and national levels which are likely to hamper the country’s ability to launch counter-cyclical responses to the ongoing crisis.

Socialized credit and the working-class family economy: a comparative history of Britain and France 1900-2000

This paper provides a comparative analysis of working class consumer credit in Britain and France from the early twentieth century through to the 1980s. It indicates a number of similarities between the two nations in the earlier part of the period: in particular, in the operation of doorstep credit systems. For the British case study, we explore consumer finance offered by credit drapers (sometimes known as tallymen) whilst in France the paper explores a similar system that functioned in the coalmining communities around the city of Lens. Both methods operated on highly socialised relationships that established the trust on which credit was offered and long-term creditor/borrower relationships established. In the second part of the paper, we analyse the different trajectories taken in post-war France and Britain in this area of working class credit. In France this form of socialized credit gradually dwindled due to factors such as ‘Bancarisation’, which saw the major banks emerge as modern bureaucratized providers of credit for workers and their families. In contrast, in Britain the tallymen (and other related forms of doorstep credit providers) were offered a new lease of life in the 1960s and 1970s. This was a period during which British credit providers utilised multiple methods to evade the hire purchase controls put in place by post-war governments. Thus, whilst the British experience was one of fragmented consumer loan types (including the continuation of doorstep credit), the French experience (like elsewhere in Europe) was one of greater consolidation. The paper concludes by reflecting on the role of these developments in the creation of differential experiences of credit inclusion/exclusion in the two nations and the impact of this on financial inequality.

Global Systemic Risk and International Regulatory Coordination: Squaring Sovereignty and Financial Stability

In recent years much attention has been given to systemic risk and maintaining financial stability. Much of the focus, rightly, has been on market failures and the role of regulation in addressing them. This article looks at the role of domestic policies and government actions as sources of global instability. The global financial system is built upon global markets controlled by national financial and macroeconomic policies. In this context, regulatory asymmetries, diverging policy preferences, and government failures add a further dimension to global systemic risk not present at the national level.
Systemic risk is a result of the interplay between two independent variables: an underlying trigger event, in this analysis a domestic policy measure, and a transmission channel. The solution to systemic risk requires tackling one of these variables. In a domestic setting, the centralization of regulatory power into one single authority makes it easier to balance the delicate equilibrium between enhancing efficiency and reducing instability. However, in a global financial system in which national financial policies serve to maximize economic welfare, regulators will be confronted with difficult policy and legal tradeoffs.
We investigate the role that financial regulation plays in addressing domestic policy failures and in controlling the danger of global financial interdependence. To do so we analyse global financial interconnectedness, and explain its role in transmitting instability; we investigate the political economy dynamics at the origin of regulatory asymmetries and government failures; and we discuss the limits of regulation.

Essays on energy derivatives pricing and financial risk management

This thesis consists of an introductory chapter (essay I) and five more empirical essays on electricity markets and CO2 spot price behaviour, derivatives pricing analysis and hedging. Essay I presents the structure of the thesis and electricity markets functioning and characteristics, as well as the type of products traded, to be analyzed on the following essays. In the second essay we conduct an empirical study on co-movements in electricity markets resorting to wavelet analysis, discussing long-term dynamics and markets integration. Essay three is about hedging performance and multiscale relationships in the German electricity spot and futures markets, also using wavelet analysis. We concentrate the investigation on the relationship between coherence evolution and hedge ratio analysis, on a time-frequency-scale approach, between spot and futures which conditions the effectiveness of the hedging strategy. Essays four, five and six are interrelated between them and with the other two previous essays given the nature of the commodity analyzed, CO2 emission allowances, traded in electricity markets. Relationships between electricity prices, primary energy fuel prices and carbon dioxide permits are analyzed on essay four. The efficiency of the European market for allowances is examined taking into account markets heterogeneity. Essay five analyzes stylized statistical properties of the recent traded asset CO2 emission allowances, for spot and futures returns, examining also the relation linking convenience yield and risk premium, for the German European Energy Exchange (EEX) between October 2005 and October 2009. The study was conducted through empirical estimations of CO2 allowances risk premium, convenience yield, and their relation. Future prices from an ex-post perspective are examined to show evidence for significant negative risk premium, or else a positive forward premium. Finally, essay six analyzes emission allowances futures hedging effectiveness, providing evidence for utility gains increases with investor’s preference over risk. Deregulation of electricity markets has led to higher uncertainty in electricity prices and by presenting these essays we try to shed new lights about structuring, pricing and hedging in this type of markets.

Consumer confidence indices and stock markets’ meltdowns

Consumer confidence indices (CCIs) are a closely monitored barometer of countries’ economic health and an informative forecasting tool. Using European and US data, we provide a case study of the two recent stock market meltdowns (the post-dotcom bubble correction of 2000–2002 and the 2007–2009 decline at the beginning of the financial crisis) to contribute to the discussion on their appropriateness as proxies for stock markets’ investor sentiment. Investor sentiment should positively covary with stock market movements (DeLong, Shleifer, Summers, and Waldmann 1990); however, we find that the CCI–stock market relationship is not universally positive.We also do not find support for the information effect documented in the previous literature, but identify a more subtle relationship between consumer expectations about future household finances and stock market fluctuations.

Impact of the financial crisis on cross-border mergers and acquisitions and concentration in the global banking industry

The global banking industry has seen dramatic changes in the past 40 years. Most recently, the financial liberalization of emerging markets and the global financial crisis have significantly impacted the market share of banks worldwide. This article investigates the impact of the 2007–2008 financial crisis on cross-border mergers and acquisitions (M&As) in the banking sector and emphasizes the role of emerging-market banks in the postcrisis consolidation trend. Using M&A data and concentration data over the period 2000–2013, our analysis indicates that the financial crisis had a significant impact on worldwide M&As, especially on the direction of the transactions. Emerging-market banks appear to be major acquirers in the postcrisis period, targeting both neighboring countries and developed economies in Europe. We also observe an increase in bank concentration in developed markets most hit by the financial crisis, especially in the United States and the United Kingdom, whereas bank concentration decreased in emerging markets.

Abordagem ao risco de crédito no âmbito do acordo de Basileia III em Portugal

Dissertação para a obtenção do Grau de Mestre em Contabilidade e Finanças Orientador: Mestre Adalmiro Álvaro Malheiro de Castro Andrade Pereira

A decision-support system based on particle swarm optimization for multiperiod hedging in electricity markets

This paper proposes a particle swarm optimization (PSO) approach to support electricity producers for multiperiod optimal contract allocation. The producer risk preference is stated by a utility function (U) expressing the tradeoff between the expectation and variance of the return. Variance estimation and expected return are based on a forecasted scenario interval determined by a price range forecasting model developed by the authors. A certain confidence level is associated to each forecasted scenario interval. The proposed model makes use of contracts with physical (spot and forward) and financial (options) settlement. PSO performance was evaluated by comparing it with a genetic algorithm-based approach. This model can be used by producers in deregulated electricity markets but can easily be adapted to load serving entities and retailers. Moreover, it can easily be adapted to the use of other type of contracts.

A long-term risk management tool for electricity markets using swarm intelligence

This paper addresses the optimal involvement in derivatives electricity markets of a power producer to hedge against the pool price volatility. To achieve this aim, a swarm intelligence meta-heuristic optimization technique for long-term risk management tool is proposed. This tool investigates the long-term opportunities for risk hedging available for electric power producers through the use of contracts with physical (spot and forward contracts) and financial (options contracts) settlement. The producer risk preference is formulated as a utility function (U) expressing the trade-off between the expectation and the variance of the return. Variance of return and the expectation are based on a forecasted scenario interval determined by a long-term price range forecasting model. This model also makes use of particle swarm optimization (PSO) to find the best parameters allow to achieve better forecasting results. On the other hand, the price estimation depends on load forecasting. This work also presents a regressive long-term load forecast model that make use of PSO to find the best parameters as well as in price estimation. The PSO technique performance has been evaluated by comparison with a Genetic Algorithm (GA) based approach. A case study is presented and the results are discussed taking into account the real price and load historical data from mainland Spanish electricity market demonstrating the effectiveness of the methodology handling this type of problems. Finally, conclusions are dully drawn.

A gestão do risco de liquidez e a concessão de crédito durante os períodos de crise

Dissertação de Mestrado Apresentada ao Instituto Superior de Contabilidade e Administração do Porto para a obtenção do grau de Mestre em Contabilidade e Finanças, sob orientação do Doutor Mário Joel Matos Veiga de Oliveira Queirós.

Elaboração e estruturação de um modelo de rating interno

Temos vindo a assistir nos últimos anos a uma evolução no que respeita à avaliação do risco de crédito. As constantes alterações de regulamentação bancária, que resultam dos Acordos de Basileia, têm vindo a impor novas normas que condicionam a quantidade e a qualidade do risco de crédito que as Instituições de Crédito podem assumir nos seus balanços. É de grande importância as Instituições de Crédito avaliarem o risco de crédito, as garantias e o custo de capital, pois têm um impacto direto na sua gestão nomeadamente quanto à afetação de recursos e proteção contra perdas. Desta forma, pretende-se com o presente trabalho elaborar e estruturar um modelo de rating interno através de técnicas estatísticas, assim como identificar as variáveis estatisticamente relevantes no modelo considerado. Foi delineada uma metodologia de investigação mista, considerando na primeira parte do trabalho uma pesquisa qualitativa e na segunda parte uma abordagem quantitativa. Através da análise documental, fez-se uma abordagem dos conceitos teóricos e da regulamentação que serve de base ao presente trabalho. No estudo de caso, o modelo de rating interno foi desenvolvido utilizando a técnica estatística designada de regressão linear múltipla. A amostra considerada foi obtida através da base de dados SABI e é constituída por cem empresas solventes, situadas na zona de Paredes, num horizonte temporal de 2011-2013. A nossa análise baseou-se em três cenários, correspondendo cada cenário aos dados de cada ano (2011, 2012 e 2013). Para validar os pressupostos do modelo foram efetuados testes estatísticos de Durbin Watson e o teste de significância - F (ANOVA). Por fim, para obtermos a classificação de rating de cada variável foi aplicada a técnica dos percentis. Pela análise dos três cenários considerados, verificou-se que o cenário dois foi o que obteve maior coeficiente de determinação. Verificou-se ainda que as variáveis independentes, rácio de liquidez geral, grau de cobertura do ativo total pelo fundo de maneio e rácio de endividamento global são estatisticamente relevantes.

The impact of the European sovereign debt crisis on the recovering from the financial crisis: Equity returns of the banking sector

This paper analyses, through a dynamic panel data model, the impact of the Financial and the European Debt crisis on the equity returns of the banking system. The model is also extended to specifically investigate the impact on countries who received rescue packages. The sample under analysis considers eleven countries from January 2006 to June 2013. The main conclusion is that there was in fact a structural change in banks’ excess returns due to the outbreak of the European Debt Crisis, when stock markets were still recovering from the Financial Crisis of 2008.