Simon H. Kwan

Firm-specific information and the correlation between individual stocks and bonds

Abstract This paper examines the correlation between the returns on individual stocks and the yield changes of individual bonds issued by the same firm, and finds that they are negatively and contemporaneously correlated. This suggests that individual stocks and bonds are driven by firm-specific information that is predominantly related to the mean, rather than the variance, of the firms underlying assets. Furthermore, I find that lagged stock returns have explanatory power for current bond yield changes, while current stock returns are unrelated to lagged bond yield changes. This shows that stocks lead bonds in reflecting firm-specific information.

Operating Performance of Banks Among Asian Economies: An International and Time Series Comparison

Per unit bank operating costs are found to vary significantly across Asian countries and over time. The strong correlation between per unit labor cost and physical capital cost suggests that there exist systematic differences in bank operating efficiency across countries. The declining operating costs between 1992 and 1997 is consistent with improving operating performance. The run-up in operating costs since 1997 coincided with the Asian financial crisis, suggesting that banks incurred additional costs to deal with problem loans while outputs declined simultaneously. Labor cost share is also found to decline significantly between 1997 and 1999, perhaps because banks were able to cut labor force faster than physical capital. Significant differences in labor cost share across countries suggest cross-country differences in bank production functions. The positive relation between labor cost share and wage rate indicates that banks use more labor due to higher labor force productivity, rather than labor being cheap.

Hidden cost reductions in bank mergers: accounting for more productive banks

The bank mergers of the 1990s often triggered upward adjustments in reported depreciation and goodwill amortization expenses, apart from any change in actual costs, due to the conventions of purchase accounting. Thus, conventional measurements underestimated the sizeable and long-lasting reductions in non-interest costs achieved following mergers.The largest reductions in reported post-merger bank costs occurred in labor expenses, which were not subject to accounting revaluations. Reported premises expenses jell considerably less than that of labor when buildings were revalued. Other non-interest expenses rose, partly because amortization increased due to the additional goodwill generated by mergers.

Impact of Deposit Rate Deregulation in Hong Kong on the Market Value of Commercial Banks

This paper examines the effects of a series of events leading up to the deregulation of deposit interest rates in Hong Kong on the market value of banks. All the evidence suggests that banks earned rents from deposit interest rate rules (IRRs) and deregulation would lower these rents and hence bank market values. On average, the total abnormal return due to interest rates deregulation was around negative 4%. There is some evidence that large banks and banks with high deposit-to-asset ratio suffered a bigger drop in value, suggesting that these banks enjoyed a bigger subsidy under the IRRs. 2002 Elsevier B.V. All rights reserved. JEL classification: G21; G28

Safe and Sound Banking, 20 Years Later: What was Proposed and What has Been Adopted

In 1986, a task force of banking academics organized and sponsored by the American Bankers Association convened to examine the banking industry and the efficacy of its regulatory system. The group was charged with reviewing the problems of ensuring the safety and soundness of the banking system and evaluating a number of policy options to improve the efficiency, performance, and safety of the system by changing the structure of the deposit insurance system and the bank regulatory and supervisory process. The results of the work of the task force were published by the MIT Press as the book, Perspectives on Safe and Sound Banking (Benston et al., 1986, the Report), which includes a set of principal options and recommendations. The purpose of this article is to assess the extent to which changes in public policy regarding depository institutions have been aligned with the recommendations of the Report. We find that, over the past 20 years, several legislative initiatives and changes in regulations and the bank supervisory process have been in keeping with the specific recommendations of the Report or with the analytic framework underlying the recommendations. At the same time, other recommendations in the Report have not been taken up and some proposals rejected in the Report have been put in place by legislative and regulatory initiatives. Overall, public policy and private sector initiatives appear to have contributed to safer and sounder banking and thrift sectors over the past 20 years. Consistent with what we see as the main theme of the Report, a likely contributing factor is the more appropriate alignment of incentive for risk-taking among larger depository institutions. Developments affecting risk-taking by depository institutions likely include higher capitalizations, greater risk exposure of private sector stakeholders more generally, improvements in risk management, and supervision and regulation that is focused on overall risk.

Data for Microprudential Supervision of U.S. Banks

This chapter provides an overview of data collection for microprudential supervision in one of the most highly regulated parts of the U.S. financial sector, the banking industry. The process is dominated by a combination of on-site examinations and off-site data collection. We pay particular attention to data collection and dissemination, and how information is used within the supervisory framework. An appendix provides an overview of the international context for banking regulation and microprudential data collection.

The international transmission of shocks: foreign bank branches in Hong Kong during crises

The international transmission of shocks in the global financial system has always been an important issue for policy makers. Different types of foreign shocks have different effects and policy implications. In this paper, we examine the effects of the recent U.S. financial crisis and the European sovereign debt crisis on foreign bank branches in Hong Kong. Unlike the literature on global banking that studies a global bank’s foreign operations from a home country perspective, our analysis uses foreign bank branches in Hong Kong and has a distinct host country perspective, which is more relevant to the host country policy makers. We find that global banks use their foreign branches in Hong Kong as a funding source during a liquidity crunch in the home country, suggesting that global banks manage their liquidity risk globally. After the central bank in the home country introduced a liquidity facility to relieve funding pressure, this effect disappeared. We also find strong evidence that foreign branches of banks in the crisis countries lend significantly less in Hong Kong relative to a control group, suggesting the presence of a lending channel in the transmission of shocks from the home country to the host country.

Comments on “Trends in Organizational Form and Their Relationship to Performance: The Case of Foreign Securities Subsidiaries of U.S. Banking Organizations”

Gary Whalen’s paper examines two forms of organizational structure for nonbank activities that have received a lot of attention in the financial modernization debate: holding company subsidiaries and bank operating subsidiaries. U.S. banking firms have some flexibility in structuring their foreign operations as holding company subsidiaries, direct bank subsidiaries, or indirect bank subsidiaries. Whalen exploited this structural flexibility to study two important questions: (1) What are the most important factors influencing the way banking organizations structure their activities, in this case securities activities, when they have a choice? (2) Does structural choice result in desirable or undesirable changes in performance?