Journal of Risk and Financial Management

Research

26 pages, 3038 KiB

Open AccessArticle

The Effect of Diversification under Different Ownership Structures and Economic Conditions: Evidence from the Great Recession

by Ivonne A. Liebenberg and Zhilu Lin

J. Risk Financial Manag. 2019, 12(2), 82; https://doi.org/10.3390/jrfm12020082 - 10 May 2019

Viewed by 3688

Abstract

The effect of corporate diversification on firm performance has been extensively documented in the literature. In the general finance literature, Kuppuswamy and Villalonga (2015) studied the diversification effect during the 2007–2009 financial crisis and found that diversification adds value in the presence of [...] Read more.

The effect of corporate diversification on firm performance has been extensively documented in the literature. In the general finance literature, Kuppuswamy and Villalonga (2015) studied the diversification effect during the 2007–2009 financial crisis and found that diversification adds value in the presence of external financing constraints. Motivated by this finding, we investigate whether a similar effect applies to insurance firms and we develop hypotheses for their different ownership structures (stock vs. mutual insurers; and group vs. non-group affiliated insurers). Using a sample of property-liability insurers over a period of 2004 to 2013, we find that the effect of diversification on performance is contingent on ownership structures and economic conditions. The diversification effect for stock insurers and insurers affiliated with a group is not significantly affected by economic conditions. However, the diversification effect for mutual insurers and non-affiliated insurers is reversed during the financial crisis. More specifically, diversified firms with these kinds of ownership structures perform better than focused firms during normal economic conditions, but their performance was significantly worse during the financial crisis. Our results are robust to alternative measures of performance and diversification, and to corrections for endogeneity. Our study contributes to the diversification literature by showing how the effect of diversification varies with ownership structure under different economic conditions and the results shed light on the specific circumstances in which diversification can improve or reduce performance. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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17 pages, 1071 KiB

Open AccessArticle

The Effects of the Financing Facilitation Act after the Global Financial Crisis: Has the Easing of Repayment Conditions Revived Underperforming Firms?

by Nobuyoshi Yamori

J. Risk Financial Manag. 2019, 12(2), 63; https://doi.org/10.3390/jrfm12020063 - 15 Apr 2019

Cited by 5 | Viewed by 3210

Abstract

After the global financial crisis, the Japanese government enacted the Financing Facilitation Act in 2009 to help small and medium-sized enterprises (SMEs) that had fallen into unprofitable conditions. Under this law, when troubled debtors asked financial institutions to ease repayment conditions (e.g., extend [...] Read more.

After the global financial crisis, the Japanese government enacted the Financing Facilitation Act in 2009 to help small and medium-sized enterprises (SMEs) that had fallen into unprofitable conditions. Under this law, when troubled debtors asked financial institutions to ease repayment conditions (e.g., extend repayment periods or bring down interest rates), the institution would have the obligation to meet such needs as best as possible. Afterward, the changing of loan conditions began to be utilized often in Japan as a means for supporting underperforming companies. Although many countries employed various countermeasures against the global financial crisis, the Financing Facilitation Act was unique to Japan. However, there is criticism that it did not become an opportunity for companies to substantially reform their businesses, and that there was a moral hazard on the company’s side. This paper analyses whether the easing of repayment conditions revived underperforming firms and who were likely to recover, by using the “Financial Field Study After the End of the Financing Facilitation Act”, carried out by the Research Institute of Economy, Trade and Industry (RIETI) in Oct 2014. We found that the act was successful in that about 60% of companies whose loan conditions were changed recovered their performance after the loan condition changed, and the attitude that financial institutions had towards support was an important factor in whether performance recovered or not. In sum, the act might be effectual when financial institutions properly support firms, although previous studies tend to emphasize its problems. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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29 pages, 557 KiB

Open AccessArticle

The Global Legal Entity Identifier System: How Can It Deliver?

by Ka Kei Chan and Alistair Milne

J. Risk Financial Manag. 2019, 12(1), 39; https://doi.org/10.3390/jrfm12010039 - 07 Mar 2019

Cited by 6 | Viewed by 5059

Abstract

We examine the global legal entity identifier (LEI) system for the identification of participants in financial markets. Semi-structured interviews with data professionals revealed the many ways in which the LEI can improve both business process efficiency, and counterparty and credit risk management. Larger [...] Read more.

We examine the global legal entity identifier (LEI) system for the identification of participants in financial markets. Semi-structured interviews with data professionals revealed the many ways in which the LEI can improve both business process efficiency, and counterparty and credit risk management. Larger social benefits, including the monitoring of systemic financial risk, are achievable if it becomes the accepted universal standard for legal entity identification. Our interviews also review the substantial co-ordination and investment barriers to LEI adoption. To address these, a clear regulatory-led road map is needed for its future development, with widespread application in regulatory reporting. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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14 pages, 1320 KiB

Open AccessArticle

Has ‘Too Big To Fail’ Been Solved? A Longitudinal Analysis of Major U.S. Banks

by Satish Thosar and Bradley Schwandt

J. Risk Financial Manag. 2019, 12(1), 24; https://doi.org/10.3390/jrfm12010024 - 01 Feb 2019

Cited by 1 | Viewed by 4284

Abstract

In the wake of the global financial crisis that erupted in 2008, there has been extensive commentary and regulatory focus on the ‘Too Big to Fail’ issue. In this paper, we survey the proposed solutions and regulatory initiatives that have been undertaken. We [...] Read more.

In the wake of the global financial crisis that erupted in 2008, there has been extensive commentary and regulatory focus on the ‘Too Big to Fail’ issue. In this paper, we survey the proposed solutions and regulatory initiatives that have been undertaken. We conduct a longitudinal analysis of major U.S. banks in four discrete time periods: pre-crisis (2005–2007), crisis (2008–2010), post-crisis (2011–2013) and normalcy (2014–2016). We find that risk metrics such as leverage and volatility which spiked during the crisis have reverted to pre-crisis levels and there has been improvement in the proportion of equity capital available to cushion against asset value deterioration. However, banks have grown in size and it does not appear as if their business models have been redirected toward more traditional lending activities. We believe that it is premature to conclude that ‘Too Big to Fail” has been solved, but macro-prudential regulation is now much more effective and, consequently, banks are on a considerably sounder footing since the depths of the crisis. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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30 pages, 563 KiB

Open AccessArticle

Finance and Jobs: How Financial Markets and Prudential Regulation Shape Unemployment Dynamics

by Ekkehard Ernst

J. Risk Financial Manag. 2019, 12(1), 20; https://doi.org/10.3390/jrfm12010020 - 24 Jan 2019

Cited by 6 | Viewed by 4097

Abstract

This article explores the impact of financial market regulation on jobs. It argues that understanding the impact of finance on labor markets is key to an understanding of the trade-off between economic stability and financial sector growth. The article combines information on labor [...] Read more.

This article explores the impact of financial market regulation on jobs. It argues that understanding the impact of finance on labor markets is key to an understanding of the trade-off between economic stability and financial sector growth. The article combines information on labor market flows with indicators of financial market development and reforms to assess the implications of financial markets on employment dynamics directly, using information from the International Labour Organization (ILO) datatabse on unemployment flows. On the basis of a matching model of the labor market, it analyses the economic, institutional, and policy determinants of unemployment in- and out-flows. Against a set of basic controls, we present evidence regarding the relationship between financial sector development and reforms and their impact on unemployment dynamics. Using scenario analysis, the article demonstrates the importance of broad financial sector re-regulation to stabilize unemployment inflows and to promote faster employment growth. In particular, we find that encompassing financial sector regulation, had it been in place prior to the global financial crisis in 2008, would have helped a faster recovery in jobs. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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9 pages, 964 KiB

Open AccessArticle

A Divisia User Cost Interpretation of the Yield Spread Recession Prediction

by Ryan S. Mattson

J. Risk Financial Manag. 2019, 12(1), 7; https://doi.org/10.3390/jrfm12010007 - 06 Jan 2019

Cited by 1 | Viewed by 2955

Abstract

A re-evaluation of the role of interest rates is necessary in the wake of the Great Recession. This paper will re-evaluate the interpretation and empirical use of the yield spread as a predictor of recessions, focusing on the simplified methodology in a New [...] Read more.

A re-evaluation of the role of interest rates is necessary in the wake of the Great Recession. This paper will re-evaluate the interpretation and empirical use of the yield spread as a predictor of recessions, focusing on the simplified methodology in a New York Federal Reserve Bank paper by Estrella and Trubin. Using the user cost difference formula to calculate bond prices following the methodology in the Divisia literature begun by William A. Barnett and a unique data set from the Center for Financial Stability, the yield spread is shown to be a form of the user cost difference, and use of the user cost is shown to marginally improve the predictive abilities of the yield spread. Further research into this view of the link of interest rates and economic activity is proposed. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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24 pages, 2650 KiB

Open AccessArticle

Systemic Risk Indicators Based on Nonlinear PolyModel

by Xingxing Ye and Raphael Douady

J. Risk Financial Manag. 2019, 12(1), 2; https://doi.org/10.3390/jrfm12010002 - 20 Dec 2018

Cited by 3 | Viewed by 5541

Abstract

The global financial market has become extremely interconnected as it demonstrates strong nonlinear contagion in times of crisis. As a result, it is necessary to measure financial systemic risk in a comprehensive and nonlinear approach. By establishing a large set of risk factors [...] Read more.

The global financial market has become extremely interconnected as it demonstrates strong nonlinear contagion in times of crisis. As a result, it is necessary to measure financial systemic risk in a comprehensive and nonlinear approach. By establishing a large set of risk factors as the main bones of the financial market network and applying nonlinear factor analysis in the form of so-called PolyModel, this paper proposes two systemic risk indicators that can prognosticate the advent and trace the development of financial crises. Through financial network analysis, theoretical simulation, empirical data analysis and final validation, we argue that the indicators suggested in this paper are proved to be very effective in forecasting and tracing the financial crises from 1998 to 2017. The economic benefit of the indicator is evidenced by the enhancement of a protective put/covered call strategy on major stock markets. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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11 pages, 449 KiB

Open AccessArticle

Risk Culture and the Role Model of the Honorable Merchant

by Jürgen Bott and Udo Milkau

J. Risk Financial Manag. 2018, 11(3), 40; https://doi.org/10.3390/jrfm11030040 - 13 Jul 2018

Cited by 5 | Viewed by 6913

Abstract

The current discussion about a “risk culture” in financial services was triggered by the recent series of financial crises. The last decade saw a long list of hubris, misconduct and criminal activities by human beings on a single or even a collective basis [...] Read more.

The current discussion about a “risk culture” in financial services was triggered by the recent series of financial crises. The last decade saw a long list of hubris, misconduct and criminal activities by human beings on a single or even a collective basis in banks, in the industry or in the whole economy. As a counter-reaction, financial authorities called for a guidance by a “new” risk culture in financial institutions based on a set of abstract, formal, and normative governance processes. While traditional risk research in economics and in banking was focused on the statistical aspects of risk as the probability of loss multiplied by the amount of loss, culture is a paraphrase for the behavior in collectives and dynamics of organization found in human societies. Therefore, a “risk culture” should link the normative concepts of risk with the positive “real-world” decision-making in financial services. This paper will describe a novel view on “risk culture” from the perspective of human beings interacting in dynamical and intertemporal commercial relations. In this context “risk” is perceived by economic agents ex−ante as the consequence of the time lag between the present and the uncertain future development (compared to a probability distribution calculated by observers ex−post). For all those individual decisions—to be made under uncertainty—future “risk” includes the so-called “normal accidents”, i.e., failures that will happen at some uncertain point in time but are inevitable, and the only questions are when failure will happen and how to maintain function in the first line of defense. Finally, the shift from an abstract definition of “risk” as a probability distribution to a role model of “honorable merchants” as a benchmark for significant individual decision-making with individual responsibilities for the uncertain future outcome provides a new framework to discuss the responsibilities in the financial industry. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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11 pages, 1604 KiB

Open AccessArticle

Effectiveness of Interest Rate Policy of the Fed in Management of Subprime Mortgage Crisis

by Samet Gunay and Bojan Georgievski

J. Risk Financial Manag. 2018, 11(1), 9; https://doi.org/10.3390/jrfm11010009 - 06 Feb 2018

Cited by 3 | Viewed by 4163

Abstract

The federal funds rate is one of the most important monetary policy instruments of Federal Reserve Bank of America. In this study, we analyze the effectiveness of Fed interest rate policy on different markets in the period between 1976 and 2016 through Markov [...] Read more.

The federal funds rate is one of the most important monetary policy instruments of Federal Reserve Bank of America. In this study, we analyze the effectiveness of Fed interest rate policy on different markets in the period between 1976 and 2016 through Markov regime-switching regression analysis. Results indicate that Federal funds’ rate affects labor and housing markets with a few months’ lag. However, the influence of Federal funds rate on inflation rate is quite limited. It is most probable that Fed employs alternative monetary instruments to regulate inflation. The most interesting results are obtained in the domain of personal savings. The interaction of personal savings and Federal funds rate is significant during both expansion and recession regimes. Full article

(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)

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