Banking Practices 6 th Annual Banking Research Conference FDIC & JFSR Discussion by Mitchell A. Petersen Kellogg School of Management & National Bureau.

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Presentation transcript:

Banking Practices 6 th Annual Banking Research Conference FDIC & JFSR Discussion by Mitchell A. Petersen Kellogg School of Management & National Bureau of Economic Research

Role of Banks Bank’s Special Skills: Information collection and processing for capital provision Challenges: Limited internal capital -- relative to projects Expanding pool of capital when other lenders know bank has more information Solutions Loan sales, syndication, underwriting, VC Internal capital markets

On Loan Sales… Drucker & Puri Problem: Funding Loans w/ Limited Capital and Possibly Private Info Solution Seller Knows Nothing: Credit Scoring Contracting Solutions: Covenants Loan sales & syndication Loan selection: Sell Only Safe Loans Covenants matter for both

On Loan Sales… Interpreting the Findings Covenants More Binding On Sold Loans Less Slack  Increase Prob[Sale] Net Worth: Current Level or Covenant Information Asymmetry vs. Governance Loan Ratings Increase Loan Sales (Sufi, ’06) Ratings Matter & Magnitude is Large (Table 4) Rating  0.67 # of Covenants or Net Worth Slack  Governance Rules of Non-Bank Buyers

Banks and Bubbles: Gonzalez and James Who Has a Banking Relationship? Sources of Capital. If Not A bank, Then? Finance company, Internal capital (NSSBF) Venture capitalists Which Firms Does The Bank Choose? Safe and VC backed Not Your Average Bank Silicon Valley Bank & Imperial Bank: 44%

Banks and Bubbles (cont) Banking Relation  Better Performance Operating Cash Flow (EBITDA) Survival Post-IPO yes, but pre-IPO? Equity Return Performance Implications Valuation or Timing of CF ? Low Cash Flow or High Investment Banks Pick Winners or Banks Make Winners?

Capital Constraints…in Banking: Holod & Peek Firm’s Financial Problem: Internal Capital Is Insufficient (& External Capital is Expensive) Research Question: How Do Firms (Banks) Solve Problem? Financial Solutions Internal Capital (Assume Ext. Is Expensive) Move Projects (always assumed away)

Capital Constraints… (cont) Organization Structure Implications Diversification is Good (Geography, Indst) MBHC buy and sell more loans MBHC create value? Diversification w/out MBHC Role of Public Capital Markets

Summary Tie Results of Papers Together (??) Examine Similar Market Frictions A Wide Variety of Solutions Emerging Style of Research

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