GESTIÓN BANCARIA

1. GESTIÓN BANCARIA Master en Banca y Finanzas Cuantitativas (QF), 2008 Santiago Carbó Valverde Universidad de Granada

3. Santiago Carbó Valverde Universidad de Granada scarbo@ugr.es Materiales docentes en: http://www.ugr.es/~scarbo/MASTERQF08.html

4. Esquema de trabajo: • Transparencias en inglés • Presentaciones de papers en clase • Examen final • Referencia básica: - SAUNDERS, A. Y M.M. CORNETT (2000): FINANCIAL INSTITUTIONS MANAGEMENT: A MODERN PERSPECTIVE, 4ª EDICIÓN, MCGRAW HILL, NEW YORK, ESTADOS UNIDOS. - SINKEY, J. (2001): COMMERCIAL BANK FINANCIAL MANAGEMENT, SEXTA EDICIÓN, PRENTICE HALL, NEW YORK, ESTADOS UNIDOS.

5. Tema 1 LA INDUSTRIA DE SERVICIOS FINANCIEROS: LAS ENTIDADES DE DEPÓSITO (LECTURA DE REFERENCIA: BHATTACHARYA Y THAKOR, 1993)

6. Why study Financial Markets and Institutions? • They are the cornerstones of the overall financial system in which financial managers operate • Individuals use both for investing • Corporations and governments use both for financing

7. Overview of Financial Markets • Primary Markets versus Secondary Markets • Money Markets versus Capital Markets • Foreign Exchange Markets

8. Primary Markets versus Secondary Markets • Primary Markets • markets in which users of funds (e.g. corporations, governments) raise funds by issuing financial instruments (e.g. stocks and bonds) • Secondary Markets • markets where financial instruments are traded among investors (e.g. Bolsa Madrid, NYSE, NASDAQ)

9. Money Markets versus Capital Markets • Money Markets • markets that trade debt securities with maturities of one year or less (e.g. Spanish Government bonds, U.S. Treasury bills) • Capital Markets • markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year

10. Money Market Instruments Outstanding, 1990-1999 ($Bn)

11. Capital Market Instruments Outstanding, 1990-1999 ($Bn)

12. Foreign Exchange Markets • “FX” markets deal in trading one currency for another (e.g. dollar for yen) • The “spot” FX transaction involves the immediate exchange of currencies at the current exchange rate • The “forward” FX transaction involves the exchange of currencies at a specified date in the future and at a specified exchange rate

13. Overview of Financial Institutions (FIs) • Institutions that perform the essential function of channeling funds from those with surplus funds to those with shortages of funds (e.g. banks, thrifts, insurance companies, securities firms and investment banks, finance companies, mutual funds, pension funds)

14. Flow of Funds in a World without FIs: Direct Transfer Financial Claims (Equity and debt instruments) Suppliers of Funds (Households) Users of Funds (Corporations) Cash Example: A firm sells shares directly to investors without going through a financial institution

15. Flow of Funds in a world with FIs: Indirect transfer FI (Brokers) FI (Asset transformers) Users of Funds Suppliers of Funds Financial Claims (Equity and debt securities) Financial Claims (Deposits and Insurance policies)

16. Types of FIs • Commercial banks • depository institutions whose major assets are loans and major liabilities are deposits • Thrifts and savings banks • depository institutions in the form of savings banks, savings and loans, credit unions, credit cooperatives • Insurance companies • financial institutions that protect individuals and corporations from adverse events (continued)

17. Securities firms and investment banks • financial institutions that underwrite securities and engage in securities brokerage and trading • Finance companies • financial institutions that make loans to individuals and businesses • Mutual Funds • financial institutions that pool financial resources and invest in diversified portfolios • Pension Funds • financial institutions that offer savings plans for retirement

18. Services Performed by Financial Intermediaries • Monitoring Costs • aggregation of funds provides greater incentive to collect a firm’s information and monitor actions • Liquidity and Price Risk • provide financial claims to savers with superior liquidity and lower price risk (continued)

19. Transaction Cost Services • transaction costs are reduced through economies of scale • Maturity Intermediation • greater ability to bear risk of mismatching maturities of assets and liabilities • Denomination Intermediation • allow small investors to overcome constraints imposed to buying assets imposed by large minimum denomination size

20. Services Provided by FIs Benefiting the Overall Economy • Money Supply Transmission • Depository institutions are the conduit through which monetary policy actions impact the economy in general • Credit Allocation • often viewed as the major source of financing for a particular sector of the economy (e.g. farming and real estate) (continued)

21. Services Provided by FIs Benefiting the Overall Economy • Intergenerational Wealth Transfers • life insurance companies and pension funds provide savers with the ability to transfer wealth from one generation to the next • Payment Services • efficiency with which depository institutions provide payment services directly benefits the economy

22. Risks Faced by Financial Institutions • Interest Rate Risk • Foreign Exchange Risk • Market Risk • Credit Risk • Liquidity Risk • Off-Balance-Sheet Risk • Technology Risk • Operation Risk • Country or Sovereign Risk • Insolvency Risk

23. Regulation of Financial Institutions • FIs provide vital financial services to all sectors of the economy; therefore, their regulation is in the public interest • In an attempt to prevent their failure and the failure of financial markets overall

24. Globalization of Financial Markets and Institutions • Financial Markets became more global as the value of stocks traded in foreign markets soared • Foreign bond markets have served as a major source of international capital • Globalization also evident in the derivative securities market

25. Factors Leading to Significant Growth in Foreign Markets • The pool of savings from foreign investors has increased • International investors have turned to U.S. and other markets to expand their investment opportunities • Information on foreign investments and markets is now more accessible (e.g. internet) • Some mutual funds allow ability to invest in foreign securities with low transaction costs • Deregulation has enhanced globalization of capital flows

26. Tema 2 ¿POR QUÉ SON ESPECIALES LOS INTERMEDIARIOS BANCARIOS? (LECTURA DE REFERENCIA: ALLEN Y SANTOMERO (1997)

27. Why Are Financial Intermediaries Special? • Objectives: • Develop the tools needed to measure and manage the risks of FIs. • Explain the special role of FIs in the financial system and the functions they provide. • Explain why the various FIs receive special regulatory attention. • Discuss what makes some FIs more special than others.

28. Equity & Debt Households (net savers) Cash Without FIs Corporations (net borrowers)

29. FIs’ Specialness • Without FIs: Low level of fund flows. • Information costs: • Economies of scale reduce costs for FIs to screen and monitor borrowers • Less liquidity • Substantial price risk

30. FI (Brokers) FI (Asset Transformers) Households Corporations Equity & Debt Cash Deposits/Insurance Policies Cash With FIs

31. Financial Structure Puzzles: a way to explain the role of FIs • stocks are not the most important source of external financing for businesses • issuing debt and equity is not the main way that businesses finance operations • indirect financing is more important than direct financing • banks are the most important source of external funds for businesses • financial industry is one of the most heavily regulated industries • only large, well-known firms have access to the securities markets • collateral is an important part of debt contracts for businesses and households • debt contracts are complex and often contain many restrictions for the borrower

32. Transaction Costs • information and other transaction costs in financial system can be substantial • How do transaction costs affect investing? • How can financial intermediaries reduce transaction costs?

33. Asymmetric Information • one party to a transaction has better information to make decisions than the other party • asymmetric information in financial market causes two main problems • adverse selection • moral hazard

34. Adverse Selection • asymmetric information problem that occurs prior to a transaction • examples of adverse selection • result of adverse selection is that lenders may decide not to make loans if they can not distinguish between “good” and “bad” credit risks

35. Moral Hazard • asymmetric information problem that occurs after a transaction • risk that borrower will undertake risky activities that will increase the probability of default • result of moral hazard is that lenders may decide not to make a loan

36. Lemons Problem • idea presented in article by George Akerlof in terms of lemons in used car market • used car buyers are unable to determine quality of car - good car or lemon? • What amount is buyer willing to pay for this used car of unknown quality? • How can buyer improve information on quality?

37. Lemons Problem in Stock and Bond Market • asymmetric information prevents investors from identifying good and bad firms • What price will these investors pay for stock? • Who has better information about the firm? • Which firms will “come to the market” for financing under these conditions?

38. Principal-Agent Problem • define the principal-agent problem • Who is the principal and who is the agent? • What problem does a separation of ownership and control cause? • How could we prevent principal-agent problem?

39. Solutions to Financing Puzzles • lemons or adverse selection problem tells why marketable securities are not the primary source of financing • situation is similar in corporate bond market • tells why stocks are not the most important source of external financing

40. More Solutions to Financial Structure Puzzles • importance of financial intermediaries explains importance of indirect financing • explains why banks are most important source of external financing • explains why markets are only available to large, well-known firms

41. Functions of FIs • Brokerage function • Acting as an agent for investors: • e.g. Merrill Lynch, Charles Schwab • Reduce costs through economies of scale • Encourages higher rate of savings • Asset transformer: • Purchase primary securities by selling financial claims to households • These secondary securities often more marketable

42. Role of FIs in Cost Reduction • Information costs: • Investors exposed to Agency Costs • Role of FI as Delegated Monitor (Diamond, 1984) • Shorter term debt contracts easier to monitor than bonds • FI likely to have informational advantage

43. Services Performed by FIs • Monitoring Costs • Liquidity and Price Risk • Transaction Cost Services • Maturity Intermediation • Denomination Intermediation

44. Services Provided by FIs • Money Supply Transmission • Credit Allocation • Intergenerational Wealth Transfers • Payment Services (continued)

45. Regulation of FIs • Regulation is not costless • Net regulatory burden. • Safety and soundness regulation • Monetary policy regulation • Credit allocation regulation • Consumer protection regulation • Investor protection regulation • Entry regulation

46. Changing Dynamics of Specialness • Trends in the United States • Decline in share of depository institutions. • Increases in pension funds and investment companies. • May be attributable to net regulatory burden imposed on depository FIs. • Technological changes affect delivery of financial services and regulatory issues • Potential for regulations to be extended to hedge funds • Result of Long Term Capital Management disaster

47. Future Trends • Weakening of public trust and confidence in FIs may encourage disintermediation • Increased merger activity within and across sectors • Citicorp and Travelers, UBS and Paine Webber • More large scale mergers such as J.P. Morgan and Chase, and Bank One and First Chicago • Growth in Online Trading • Increased competition from foreign FIs at home and abroad • Mergers involving world’s largest banks • Mergers blending together previously separate financial services sectors

48. Tema 3 ORGANIZACIÓN INDUSTRIAL DEL SECTOR BANCARIO (LECTURA DE REFERENCIA: HUMPHREY ET AL. (2006))

49. 3. Bank competition 3.1. BANK COMPETITION • THE STRUCTURE-CONDUCT-PERFORMANACE (SCP) PARADIGM: Many empirical studies have considered concentration - mainly the Herfindahl-Hirschman Index (HHI) - as a proxy for bank market power following the Structure-Conduct-Performance (SCP) paradigm (Berger and Hannan, 1989; Hannan and Berger, 1991). • However, several contributions to the banking literature during the last two decades have cast doubt on the consistency and robustness of concentration as an indicator of market power (Berger, 1995; Rhoades, 1995; Jackson 1997; Hannan, 1997).

50. IO theory predicts a correspondence between the Lerner index (L) – as the spread between prices (P) and marginal costs (C’) divided by prices - and the HHI so that , where is a conjecture parameter showing the response of the industry output to changes to a unit output change by the firm, and is the industry price elasticity of demand. If =1 there is a monopoly solution while if =0, then a Bertrand solution holds with L=0. • Hence, the correspondence depends upon restrictive assumptions on the conjecture and demand elasticity parameters.