Measuring and testing for the systemically important financial institutions

This paper analyzes the measure of systemic importance ∆CoV aR proposed by Adrian and Brunnermeier (2009, 2010) within the context of a similar class of risk measures used in the risk management literature. In addition, we develop a series of testing procedures, based on ∆CoV aR, to identify and rank the systemically important institutions. We stress the importance of statistical testing in interpreting the measure of systemic importance. An empirical application illustrates the testing procedures, using equity data for three European banks.

Three Essays in Empirical Asset Pricing

The financial crisis of 2007-2008 led to extraordinary government intervention in firms and markets. The scope and depth of government action rivaled that of the Great Depression. Many traded markets experienced dramatic declines in liquidity leading to the existence of conditions normally assumed to be promptly removed via the actions of profit seeking arbitrageurs. These extreme events motivate the three essays in this work. The first essay seeks and fails to find evidence of investor behavior consistent with the broad 'Too Big To Fail' policies enacted during the crisis by government agents. Only in limited circumstances, where government guarantees such as deposit insurance or U.S. Treasury lending lines already existed, did investors impart a premium to the debt security prices of firms under stress. The second essay introduces the Inflation Indexed Swap Basis (IIS Basis) in examining the large differences between cash and derivative markets based upon future U.S. inflation as measured by the Consumer Price Index (CPI). It reports the consistent positive value of this measure as well as the very large positive values it reached in the fourth quarter of 2008 after Lehman Brothers went bankrupt. It concludes that the IIS Basis continues to exist due to limitations in market liquidity and hedging alternatives. The third essay explores the methodology of performing debt based event studies utilizing credit default swaps (CDS). It provides practical implementation advice to researchers to address limited source data and/or small target firm sample size.

The price of honour: The corporate governance of Banco Espirito Santo

The Price of Honour is a case study, supported with teaching notes, which describes the events and circumstances surrounding the implosion of one of Portugal’s most systemically important banks - Banco Espírito Santo (BES). The case focuses on BES’s corporate governance and how the Espírito Santo family’s tight control of the bank led to its exploitation. Although the situation caught the attention of the bank’s supervisors, their untimely actions could not prevent BES’s financial health from crumbling only two months after a rights issue. With little leeway, the supervisors put forward a resolution which dramatically ended the bank’s centennial legacy.

Taming SIFIs

We model a Systemically Important Financial Institution (SIFI) that is too big(or too interconnected) to fail. Without credible regulation and strong supervision,the shareholders of this institution might deliberately let its managers take excessiverisk. We propose a solution to this problem, showing how insurance againstsystemic shocks can be provided without generating moral hazard. The solutioninvolves levying a systemic tax needed to cover the costs of future crises and moreimportantly establishing a Systemic Risk Authority endowed with special resolutionpowers, including the control of bankers' compensation packages during crisisperiods.

The Role of a firm’s mindset in international success - case study of Finnish marine industry firms

This thesis investigates the influence of a firm’s mindset on international success in the context of the Finnish marine industry. The study draws theoretical wisdom from organisational behaviour and strategic management literatures. The research aim set for this study was to identify and categorise existing strategic types based on mindsets found in the marine industry SMEs, and to link the influence of mindsets with success by examining the role of mindsets in a firm’s performance. Mindsets of firms were conceptualised as aggregate collections of perceptions that influence how the surrounding environment is discerned by the members of the firm. Mindsets are idiosyncratic to firms and therefore important firm-specific resources which influence decision-making and can be observed through the strategic behaviour of firms. Qualitative case study method was applied which was further supported by quantitative data on the financial performance of the ten case firms. Taxonomy based on the dimension of mindsets and prediction was developed to demonstrate four ideal types of firms identified within the marine industry. It was found that all of the case firms emphasised adaptation in their strategy while planning was emphasised to a varying degree. Moreover, two different methods of adapting were found; proactive and reactive. Firms which plan in the long-term and adapt proactively constantly investigate whether their plans are synchronous with the realities of the market; by having an open mindset, a firm’s perception of the reality of the market is enabling the firm to develop value creating strategies which are superiorly informed.This finding was supported by the financial data and led to the proposition that having an open mindset and placing a high level of emphasis on prediction may have a positive influence on international success. Also, it was proposed that concentrating only on exploiting business opportunities in the present time and not exploring any addition opportunities can have a negative influence on the firm’s performance, even if the mindset of the firm is open.

De lo micro a lo macro prudencial: Un análisis de la supervisión bancaria desde la econometría espacial

La crisis que se desató en el mercado hipotecario en Estados Unidos en 2008 y que logró propagarse a lo largo de todo sistema financiero, dejó en evidencia el nivel de interconexión que actualmente existe entre las entidades del sector y sus relaciones con el sector productivo, dejando en evidencia la necesidad de identificar y caracterizar el riesgo sistémico inherente al sistema, para que de esta forma las entidades reguladoras busquen una estabilidad tanto individual, como del sistema en general. El presente documento muestra, a través de un modelo que combina el poder informativo de las redes y su adecuación a un modelo espacial auto regresivo (tipo panel), la importancia de incorporar al enfoque micro-prudencial (propuesto en Basilea II), una variable que capture el efecto de estar conectado con otras entidades, realizando así un análisis macro-prudencial (propuesto en Basilea III).

Caracterización de la relación estratégica comunitaria y la salud financiera en empresas de mercados emergentes

El presente proyecto, se planteó una necesidad clara por satisfacer. Las organizaciones hoy en día, necesitan nuevas herramientas que permitan predecir y minimizar riesgos de mercado, con el fin de mejorar su desempeño, su competitividad, su salud financiera y sobre todo, ser más perdurables en ambientes caóticos e inestables. Se planteó un objetivo claro a cumplir, cómo pueden las empresas mejorar su relación con los consumidores y sus comunidades, con el fin de, identificar factores que impacten positivamente la salud financiera de las organizaciones. Es pertinente, el estudio de la salud financiera en empresas de mercados emergentes y los impactos en la implementación de diferentes estrategias comunitarias para establecer métodos que minimicen los riesgos y mejoren el desempeño empresarial. Para cumplir la propuesta planteada, fue necesario abarcar diferentes fuentes de información relacionadas a temas financieros y de mercadeo. Se buscó, tomar ejemplos, teorías y modelos ya implementados en estudios similares y con objetivos en común, relacionados a: uso de indicadores financieros, valoración corporativa, valoración de los estados financieros, diagnóstico de la salud financiera, el uso de estrategias de mercadeo relacional, la fidelización de clientes y el uso de estrategias comunitarias. Además, fue necesaria la búsqueda de empresas en los mercados emergentes de Brasil y Colombia, que representan el tipo de muestra deseada para desarrollar el estudio y sus objetivos. A dicha empresa, se le realizará una serie de estudios para poder satisfacer las necesidades planteadas en el presente proyecto. Por medio de dichos estudios, se pretende identificar relaciones en el uso de estrategias comunitarias y sus impactos en la salud financiera de las organizaciones. Es importante, identificar factores de riesgo y de protección para prevenir impactos negativos o potencializar aquellos que beneficien a las empresas. Con lo anterior, será posible obtener pruebas o herramientas que mejoren los procesos de toma de decisiones de alta dirección, la formulación de directrices en estrategia corporativa y definición de ventajas competitivas de la organización. Se pretende, brindar una aproximación a nuevos conocimientos y enfoques de estudios, expuestos en el proyecto, para mejorar la ciencia de la gestión, el desempeño y la perdurabilidad empresarial en mercados emergentes. El proyecto, tomó como fuente de estudio, el banco Brasileño Itau Unibanco Holding S.A. que representa de la mejor forma, el tipo de muestra necesaria para poder cumplir con los objetivos planteados. El banco, tienen presencia en la región bastante importante y sigue con metas de expansión e internacionalización. Además de eso, es considerado el banco privado más grande de Brasil, el cuarto mayor de Chile y la quinta institución financiera de Colombia. Ha sido ganador, de varios galardones y reconocimiento por sus buenas practicas, su enfoque hacia la sostenibilidad, la sociedad, el buen ambiente y los derechos. El proyecto, culminó demostrando que efectivamente el uso de estrategias comunitarias tiene un impacto importante en la imagen corporativa, la reputación y como consecuencia, en la estabilidad financiera. Se evidenció, también, el desempeño del banco Itau Unibanco Holding del año 2013, donde, se aplicaron diferentes estudios, indicadores y demás, que demostraron un buen resultado, y por ende, una fuerte posición y salud financiera. Adicionalmente, se mostraron diferentes tipos de estrategias que el banco usa hoy en día dirigidas a las comunidades, evidenciando ejemplos en Brasil y en Chile y describiendo los proyectos, los programas o las estrategias que el banco usa para aportar a la comunidad, ser parte de la sociedad, mejorar su imagen, aumentar su reputación, profundizar en la caracterización de las necesidades de sus consumidores y revertir todo lo anterior en mejores soluciones, mejores productos y mejores formas de relacionamiento. Dicha integración en el ambiente y en el entorno de sus consumidores impacta de buena manera los resultados financieros y permite que la posición en el mercado se mantenga fuerte y firme.

A Network model of systemic risk : identifying the sources of dependence across institutions

We design a financial network model that explicitly incorporates linkages across institutions through a direct contagion channel, as well as an indirect common exposure channel. In particular, common exposure is setup so as to link the financial to the real sector. The model is calibrated to balance sheet data on the colombian financial sector. Results indicate that commercial banks are the most systemically important financial institutions in the system. Whereas government owned institutions are the most vulnerable institutions in the system.

The Law and Economics of Hedge Fund Regulation: A Comparison between the U.S. and the EU

This doctoral dissertation seeks to assess and address the potential contribution of the hedge fund industry to financial instability. In so doing, the dissertation investigates three main questions. What are the contributions of hedge funds to financial instability? What is the optimal regulatory strategy to address the potential contribution of hedge funds to financial instability? And do new regulations in the U.S. and the EU address the contribution of hedge funds to financial instability? With respect to financial stability concerns, it is argued that despite their benefits, hedge funds can contribute to financial instability. Hedge funds’ size and leverage, their interconnectedness with Large Complex Financial Institutions (LCFIs), and the likelihood of herding behavior in the industry can potentially undermine financial stability. Nonetheless, the data on hedge funds’ size and leverage suggest that these features are far from being systemically important. In contrast, the empirical evidence on the interconnectedness of hedge funds with LCFIs and their herding behavior is mixed. Based on these findings, the thesis focuses on one particular aspect of hedge fund regulation: direct vs. indirect regulation. In this respect, a major contribution of the thesis to the literature consists in the explicit discussion of the relationships between hedge funds and other market participants. Specifically, the thesis locates the domain of the indirect regulation in the inter-linkages between hedge funds and prime brokers. Accordingly, the thesis argues that the indirect regulation is likely to address the contribution of hedge funds to systemic risk without compromising their benefits to financial markets. The thesis further conducts a comparative study of the regulatory responses to the potential contribution of hedge funds to financial instability through studying the EU Directive on Alternative Investment Fund Managers (AIFMD) and the hedge fund-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The Challenges of the EU Banking Union - will it succeed in dealing with the next financial crisis? Bruges European Economic Policy Briefings 36/2015

The EU Banking Union combines micro- and macro-prudential regulation. It aims at breaking the “doom loop” between banks and sovereign debt, promoting financial stability and mitigating the next financial shock to the real EU economy, at the lowest possible cost to the financial institutions and to the taxpayers. Success, or failure, is determined by how the banking union copes with the challenges to its two main pillars, the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). Under the SSM, in its new supervisory role, the ECB may be subject to conflicts between the objectives of price and financial stability, and the single-supervisor role may be sub-optimal. Two regulators might have been preferable and more focus on ECB accountability will now be required. The shock-absorbing Single Resolution Fund (SRF), which is part of the SRM, may not have the capacity to deal with a crisis of the size of the one of 2008. Especially as the nature and severity of a future financial crisis cannot be forecasted. The design of the banking union is not the result of theoretical studies, but a political compromise to deal with an acute crisis. The theoretical studies that are included in this paper are not supportive of the banking union in its current form. Nevertheless, there is a good chance that the EU Banking Union may succeed, as ECB supervision of the 123 systemically important banks should contain potential demands on the SRM. In the event of a crisis that is too severe for the banking union to absorb with its current capability, the crucial assumption is that there is political will to rapidly provide new resources. The same applies, if a major financial crisis develops before the banking union is fully operational.

The Challenges of the EU Banking Union - will it succeed in dealing with the next financial crisis? Bruges European Economic Policy (BEEP) Briefings 36/2015

The EU Banking Union combines micro- and macro-prudential regulation. It aims at breaking the “doom loop” between banks and sovereign debt, promoting financial stability and mitigating the next financial shock to the real EU economy, at the lowest possible cost to the financial institutions and to the taxpayers. Success, or failure, is determined by how the banking union copes with the challenges to its two main pillars, the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). Under the SSM, in its new supervisory role, the ECB may be subject to conflicts between the objectives of price and financial stability, and the single-supervisor role may be sub-optimal. Two regulators might have been preferable and more focus on ECB accountability will now be required. The shock-absorbing Single Resolution Fund (SRF), which is part of the SRM, may not have the capacity to deal with a crisis of the size of the one of 2008. Especially as the nature and severity of a future financial crisis cannot be forecasted. The design of the banking union is not the result of theoretical studies, but a political compromise to deal with an acute crisis. The theoretical studies that are included in this paper are not supportive of the banking union in its current form. Nevertheless, there is a good chance that the EU Banking Union may succeed, as ECB supervision of the 123 systemically important banks should contain potential demands on the SRM. In the event of a crisis that is too severe for the banking union to absorb with its current capability, the crucial assumption is that there is political will to rapidly provide new resources. The same applies, if a major financial crisis develops before the banking union is fully operational.

A full and correct report of the important trial of Major Hart v. Henry Alexander, one of the partners of the late firm of Alexander and Co. of Calcutta : before Lord Abinger and a special jury, Court of Exchequer, 13tn Feb. 1837.

Mode of access: Internet.

When Corporate Governance crosses the firm borders: family firms in local productive systems

The family involvement in firms is observable is most economies around the world, although there are significant differences among these countries, not only regarding its predominance in these economies, but also in what refers to the levels of involvement of the family in business. This research aims at understanding the family-based firms’ management when compared to non family based, with particular regards to the forms of corporate governance. This analysis is based on case studies and on secondary data found in the literature to support the findings from the empirical research. The data was collected via face to face in-depth interviews with entrepreneurs from the furniture and the events organisation industries (where the family is predominantly present in the furniture but not on the events organisation industry) and with industry and regional business associations. The case studies used in this research allowed the comparison between the Portuguese firms when the family plays an important role in business and those in which the family is absent. It has been found that there are important differences in businesses in countries/industries/local productive systems in which the family is seen as a dominant institution in the society (where businesses are based on strong ties; there is a harmonious relationship between the family members; and the family is accepted locally and dominates the firm organization) and on situations in which the family plays a more marginal role in the society. In fact, the family brings special characteristics to the business, in terms of management, corporate governance, inter and intra firm relationships and succession. Our findings confirm other empirical studies’ results found in the literature. Thus, this article provides a discussion on the factors that play a role in the form of corporate governance structure in family firms highlighting the pros and cons of organising the firm around the family.

The graduate: Spillovers from the entry of the first worker with a college degree in a firm

A Work Project, presented as part of the requirements for the Award of a Double Degree in Economics from NOVA School of Business and Economics and Maastricht School of Business and Economics

Bias in returns to tenure when firm wages and employment comove: A quantitative assessment and solution

It is well known that, unless worker-firm match quality is controlled for, returns to firm tenure (RTT) estimated directly via reduced form wage (Mincer) equations will be biased. In this paper we show that even if match quality is properly controlled for there is a further pervasive source of bias, namely the co-movement of firm employment and firm wages. In a simple mechanical model where human capital is absent and separation is exogenous we show that positively covarying shocks (either aggregate or firm level) to firms employment and wages cause downward bias in OLS regression estimates of RTT. We show that the long established procedures for dealing with "traditional" RTT bias do not circumvent the additional problem we have identified. We argue that if a reduced form estimation of RTT is undertaken, firm-year fixed effects must be added in order to eliminate this bias. Estimates from two large panel datasets from Portugal and Germany show that the bias is empirically important. Adding firm-year fixed effects to the regression increases estimates of RTT in the two respective countries by between 3.5% and 4.5% of wages at 20 years of tenure over 80% (50%) of the estimated RTT level itself. The results extend to tenure correlates used in macroeconomics such as the minimum unemployment rate since joining the firm. Adding firm-year fixed effects changes estimates of these effects also.