Arjen Mulder

The determinants of bank internationalisation in times of financial globalisation: evidence from the world's largest banks, 1980-2007

This article analyses the determinants of bank internationalisation, of the worlds largest banks from the period 1980–2007. The purpose of the article is twofold. First, we show how a mixed-methods research design, in which we combine a variables-based research with three case studies, can contribute to the field of business history. The variables-based research helps to detect general trends, but the statistical analysis alone only provides a limited understanding of the factors that drive the trends. By analysing selected case studies, we provide a context within which the statistical results are better understood. The second purpose is to understand trends in the internationalisation strategies of banks from different regions, and during different time periods. Contrasting with prior research, we find that Japanese and US banks have exhibited different internationalisation pattern as opposed to the European banks. Also, the determinants of bank internationalisation differ in importance over time. Using case studies, we show the importance of the changing regulatory environment.

Asymmetric Extreme Sampling, Developed Versus Emerging Countries, and the Forward Premium Puzzle

We analyse the validity of UIP in a panel of 41 currencies over the time window 1975-2010. We confirm that in general UIP does not hold for developed countries, whereas it does hold for emerging countries. This result is found for various metrics of ‘developed’ and ‘emerging’ countries (IMF country classification, per capita GNI, inflation, inflation volatility). We confirm that UIP may hold in the extremes for developed countries, but this result is only found in the right-hand side tail of interest rate differentials (IRDs). Contrasting with earlier work (that assumed absolute IRDs) our findings suggest an asymmetric relationship. For emerging countries we find an inverse relationship, namely UIP does not hold in the extremes but it does hold in the centre 80% of observations.

The (Un)Profitability of Bank Internationalization

We investigate the impact of internationalization of banks on their performance. Using a novel data set comprising of the worlds 46 largest banks spanning 1980-2004, we find that internationalization decreases performance measures as return-on assets or return-on-sales. That negative effect is magnified when controlling for risk or for response time lags. At best, internationalization has a very weak positive effect on performance on a forward-looking performance measure as Tobins Q. We explain this discrepancy in performance by means of nonparametric tests, and find weak evidence for a nonlinear pattern in which internationalization may deliver value for banks beyond an internationalization threshold of approximately 50 percent.

An Infrastructure Problem in Ecological Economics: Solar Battery Recycling in Rural Electrification

This paper introduces an incentive incompatibility problem that causes dramatic damage to delicate ecosystems. The aim is to rethink policies that facilitate the introduction of aggressive solid waste in markets with an imperfect infrastructure and in the absence of a secondary market for the solid waste. We sketch a case study in Nepal, where rural electrification through solar systems leads to the dumping of used batteries.

Do Exchange Rates Move in Line With Uncovered Interest Parity

According to uncovered interest rate Parity (UIP), the expected relative change in an exchange rate is equal to the difference between interest rates between the two currencies. Empirically, UIP is frequently rejected. In this paper, we examine whether exchange rates have at least any tendency to move in the direction predicted by UIP and whether exchange rates tend to move more in line with UIP in periods with large interest rate differentials.

Conditioning carry trades: Less risk, more return

textabstractPrior studies show that extreme interest rate dfferentials (IRDs) and high foreign exchange rate (FX) volatility have substantial explanatory power for the validity of UIP. We show that these contemporaneous drivers also have predictive power by implementing a conditional currency carry trade (CT) strategy that excludes regimes for which UIP is likely to hold. Conditioning high FX volatility only, or on both FX volatility and extreme IRDs outperforms the base-case unconditional CT strategy in virtually any of the settings analyzed. Conditioning on very large IRDs only shows mixed findings. Our strategy works best for smaller CT portfolios.

Bank Loan Contract Design through Learning and Renegotiating

We develop a model of dynamic debt based on a learning framework. Most of the literature on dynamic debt contracts focuses on information asymmetry as the determinant of renegotiation. We show, however, how differences in expectations may also trigger renegotiation. Such renegotiation occurs in many real-life situations, where both debtor and creditor learn about the true performance of an investment project. Although the two parties agreed beforehand on the conditions of the debt contract, they may develop different expectations over time. In our model, we show how at each moment in time, not only the realized profitability of a project but also the expectations regarding that profitability may form the impetus for renegotiation. This difference in expectations may be inherent in the nature of either party: Just as entrepreneurs may be overconfident and optimistic, banks may bear the opposite characteristics. Therewith, even when using the same information, both debtor and creditor may assign a different risk profile to the same project, which feeds the sentiment for renegotiation. We work out the case for a lowering of the coupon rate, triggered by the debtor. Although the conventional literature would treat such renegotiation as a downside risk for the creditor, we readily provide conditions under which both parties benefit from the renegotiation. Therewith, our dynamic model of debt points to solutions that are Pareto efficient. An additional feature of our model is its discouragement of risk-seeking behavior on the side of the debtor. Although it might seem tentative for the debtor to increase the projects profitability, should increase should not be realized at the expense of income volatility. When working out a numerical example, we found that for every increment in income volatility, a similar increment in the minimum coupon rate was observed for which the creditor would be willing to renegotiate at all. Also, increasing the projects profits without increasing the amortization payments on the loan leads to a smaller chance for the renegotiation process to be successful. Although debtors will probably try to increase their projects profitability, such strategy alone does not suffice for a successful renegotiation process. We show that creditors may be willing to lower the coupon rate over a larger bandwidth, but then the profitable debtor must increase the speed of amortization as well. Our model allows banks to safely enter into markets otherwise restricted to providers of equity or risky debt.