The Loss Distribution of the Entrepreneurial Bad Debt Risk – a Simulation-based Model
Henry Dannenberg
IWH Discussion Papers,
No. 10,
2006
Abstract
The risk of bad debt losses evolves for companies which grant payment targets. Possible losses have to be covered by these companies equity and liquidity reserves. The question of how to quantify the level of risk of bad debt losses will be discussed in this paper. Input values of this risk are the probability of default, exposure at default and loss given default. It is shown how companies can derive probability functions to describe uncertainty and variability for each input value. Based on these probability functions a simulation model is developed to quantify the risk of bad debt losses. Based on an empirical study probability functions for probability of default and loss given default are presented.
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Asset Tangibility and Capital Allocation within Multinational Corporations
Diemo Dietrich
IWH Discussion Papers,
No. 4,
2006
Abstract
We investigate capital allocation across a firm's divisions that differ with respect to the degree of asset tangibility. We adopt an incomplete contracting approach where the outcome of potential debt renegotiations depends on the liquidation value of assets. However, with diversity in terms of asset tangibility, liquidation proceeds depend on how funds have been allocated across divisions. As diversity can be traced back to institutional differences between countries, we provide a rationale for multidivisional decision- making in an international context. A main finding is that multinationals may be bound to go to certain countries when financiers cannot control the capital allocation.
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Why do we have an interbank money market?
Jürgen Wiemers, Ulrike Neyer
IWH Discussion Papers,
No. 182,
2003
Abstract
The interbank money market plays a key role in the execution of monetary policy. Hence, it is important to know the functioning of this market and the determinants of the interbank money market rate. In this paper, we develop an interbank money market model with a heterogeneous banking sector. We show that besides for balancing daily liquidity fluctuations banks participate in the interbank market because they have different marginal costs of obtaining funds from the central bank. In the euro area, which we refer to, these cost differences occur because banks have different marginal cost of collateral which they need to hold to obtain funds from the central bank. Banks with relatively low marginal costs act as intermediaries between the central bank and banks with relatively high marginal costs. The necessary positive spread between the interbank market rate and the central bank rate is determined by transaction costs and credit risk in the interbank market, total liquidity needs of the banking sector, costs of obtaining funds from the central bank, and the distribution of the latter across banks.
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Markets for Bank Subordinated Debt and Equity in Basel Committee Member Countries
Reint E. Gropp, Jukka M. Vesala
BCBS Working Papers, No. 12,
No. 12,
2003
Abstract
This Basel Committee working paper is a study of the markets for banks' securities in ten countries (Belgium, France, Germany, Japan, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States). It aims at contributing to the assessment of the potential effectiveness of direct and indirect market discipline. This is achieved through collecting a rich set of data on the detailed characteristics of the instruments used by banks to tap capital markets, the frequency and size of their issuance activity, and the share of issuing banks in national banking systems. Further, information is collected on the amounts of debt and equity outstanding and about trading volumes and liquidity. Developments over the period from 1990-2001 are evaluated.
The paper focuses on subordinated bonds among banks' debt instruments, because they are the prime class of uninsured instruments suited to generate market discipline and have been proposed by some observers as a mandatory requirement for banks.
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Germany 2004: Only a transitory economic stimulus from moving tax cuts forward
Wirtschaft im Wandel,
No. 9,
2003
Abstract
In summer 2003 the German economy once again did not overcome the stagnation, which by now lasted three years. Only by the end of this year the German economy will begin to receive stronger support from a then further improved world economy. In the past months both US and European monetary policy have provided sufficient liquidity by lowering interest rates. In the USA, additional support is provided by fiscal policy; tax reductions and rebates increase domestic demand. Overall, Gross Domestic Product in the US will increase by 2.1% this year; in the euro area GDP will merely expand by a modest 0.8%. For Germany one of its key sectors will not be able to lift the economy as usual and GDP, when compared to last year, will only stagnate. Provided by the brought forward tax reform 2000 the coming year will begin with a stimulus to the German economy. The tax reductions, though, will have limited effect on aggregate production, as the increased consumption will not be able to stimulate investment. Accounting for calendar effects GDP in Germany will increase by at least 1% in 2004 compared with this year, but due to several additional working days in 2004, the unadjusted rate of expansion will be 1.7%. No substantial improvements are expected for the job market.
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Rating Agency Actions and the Pricing of Debt and Equity of European Banks: What Can we Infer About Private Sector Monitoring of Bank Soundness?
Reint E. Gropp, A. J. Richards
Economic Notes,
No. 3,
2001
Abstract
The recent consultative papers by the Basel Committee on Banking Supervision has raised the possibility of an explicit role for external rating agencies in the assessment of the credit risk of banks’ assets, including interbank claims. Any judgement on the merits of this proposal calls for an assessment of the information contained in credit ratings and its relationship to other publicly available information on the financial health of banks and borrowers. We assess this issue via an event study of rating change announcements by leading international rating agencies, focusing on rating changes for European banks for which data on bond and equity prices are available. We find little evidence of announcement effects on bond prices, which may reflect the lack of liquidity in bond markets in Europe during much of our sample period. For equity prices, we find strong effects of ratings changes, although some of our results may suffer from contamination by contemporaneous news events. We also test for pre-announcement and post-announcement effects, but find little evidence of either. Overall, our results suggest that ratings agencies may perform a useful role in summarizing and obtaining non-public information on banks and that monitoring of banks’ risk through bond holders appears to be relatively limited in Europe. The relatively weak monitoring by bondholders casts some doubt on the effectiveness of a subordinated debt requirement as a supervisory tool in the European context, at least until bond markets are more developed.
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Central and Eastern European stock markets: Insufficient liquidity restricts development
Thomas Linne
Wirtschaft im Wandel,
No. 5,
2000
Abstract
Als Folge der Russlandkrise im August 1998 haben viele internationale Investoren ihre Aktienengagements in den Ländern Mittel- und Osteuropas einer kritischeren Betrachtung unterzogen. Mit dem Rückgang der Portfolioinvestitionen ausländischer Anleger sind wichtige Handelsteilnehmer an den Aktienmärkten weggefallen. Dies hat die ohnehin schon geringe Liquidität noch weiter verringert. Wichtige Impulse für die Entwicklung der Kapitalmärkte können von der Gründung von Pensionsfonds ausgehen, die als Kapitalsammelstellen zusätzliche inländische Nachfrage nach Wertpapieren schaffen.
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The Total Cost of Trading Belgian Shares: Brussels versus London
Hans Degryse
Journal of Banking and Finance,
No. 9,
1999
Abstract
Since 1990, London’s SEAQ International (SEAQ-I) has attracted considerable trading volume in Belgian equities. This paper investigates competition between the Brussels CATS market and London’s SEAQ-I. Toward this end, we gathered extensive limit order book data as well as transactions and quotation information. With regard to liquidity (indirect costs), measured by the quoted and effective bid–ask spread, the paper concludes that CATS outperforms SEAQ International for both measures. The effective spread is of course substantially smaller than the quoted spread, with the CATS effective spread showing a U-shaped form. This paper, unique in employing an extensive data set that includes all hidden orders and the whole limit order book, produces results in line with the different market microstructure models. Total trading costs on CATS are lower (higher) for small (large) trade sizes.
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