Finance - Theses
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ItemLiquidity of German covered bonds before and during the financial crisis( 2015)Following the 2008 financial crisis, covered bonds (bank-issued debt instruments with credit enhancements such as dual-recourse and dynamic cover pool) have been discussed as an alternative to mortgage-backed-securities (MBS) because of their potential of adding stability to the banking system. While being liquid is a key feature of the MBS market, the liquidity of covered bonds remains less well-understood by investors and academics. To better understand covered bonds, this project measures the liquidity of German covered bonds using transactional data and several common proxies. Results show that German covered bond liquidity is resilient: German covered bonds became less liquid after the Lehman Brothers default and recovered to the pre-crisis level in only one year. Surprisingly, jumbo covered bonds (a conventionally more liquid covered bond market) have lost their liquidity advantage since the onset of the fi nancial crisis. Furthermore, although the covered bond market remained relatively liquid after the Lehman shock, the illiquidity risk premium has become larger post-Lehman compared to pre-Lehman, implying that investors require a higher compensation for holding illiquid covered bonds. The result of this study may have implications for countries that are new to covered bonds to emphasize on managing the liquidity of this market.
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ItemDo bank managers respond to debt-market discipline?( 2014)The 2007/08 financial crisis reignited debates on what is a socially optimal capital structure for banks. One school of thought suggests that debt capital could be beneficial for banks because it provides a disciplinary mechanism over the decisions of bank managers. However, inconclusive empirical evidence of the existence of debt holder discipline creates a gap between the market discipline hypothesis and reality. Given the systemic importance of banks to the financial system and the high amount of debt in banks’ capital structure; it is important to determine if debt can make banks safer through disciplining the decisions of bank managers. The thesis examines the response of bank managers to the Federal Reserve Board’s 2008 clarification of the types of bank debt covenants that are legally enforceable. Unlike the prior empirical literature, which measures market discipline by changes in the price or quantity of debt, I follow the theoretical banking literature and measure market discipline as the ratio of bank debt with legally enforceable covenants to total liabilities. The market discipline that arises from debt covenants comes from the conditionally demandable threat to bank managers and the incentivised monitoring of the debt holders. By examining a sample of bank holding companies in United States between 2005 and 2011, I find evidence of bank managers reducing wealth transfer to equity holders and reducing bank fragility in response to increases in market discipline from the 2008 clarification. I also find that opacity of a bank’s activities reduces the response of bank managers, and that market discipline influences bank managerial actions up to four calendar quarters into the future.