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ItemDo bank managers respond to debt-market discipline?Tan, Xin Yi ( 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.
ItemLoan contracting and the credit cycleJericevic, Sandra Lynne ( 2002-04)The performance of financial institutions is significantly influenced by the actions of loan officers. The process by which lending decisions are made is therefore of critical interest to management, shareholders, and regulators alike. Indeed, the drain on bank capital that has often accompanied credit quality problems in the past has encouraged the search for new approaches towards the management of lending and related activities. This thesis seeks to examine whether existing governance and incentive techniques found in banks are sufficiently comprehensive in guiding loan decision-making. In the context of lending to the corporate sector, the study investigates the endogenous and exogenous influences surrounding the lending role, and assesses the implications for how loan officers are monitored, evaluated, and motivated to act in a financial institution’s best interests. By first developing an expanded model that conceptualizes the loan offer function, and then grounding this framework within a business cycle context, the study demonstrates the potential for governance and reward systems, that are constant through time, to have variable outcomes/effects. Support for this hypothesis is provided based on publicly available financial market information and other material gathered from private sources. A proposal is then advanced for the development of a management information system that identifies changes in credit standards being applied, thereby enabling banks to benchmark and influence loan officer performance in the context of cyclically changing attitudes to risk and the effects on negotiating power.