Credit derivatives, some of the most significant developments is the financial industry, have experienced significant growth recently. The objective of this study is to examine whether the use of credit derivatives, either buying or selling, has an effect on banks loan pricing behaviour. Minton et al. (2009) propose that the net buyers of credit protection save capital and thus should be able to make loans at rates that are below the rates offered by competitors who do not utilize credit derivatives. In addition, Hirtle (2009) investigates the relationship between credit derivatives and their effects on bank lending activities. She does not find a strong association between the use of credit derivative and the supply of loans and proposes that banks are using credit derivatives mainly to provide longer maturity and lower spread loans rather than to increase the volume of loans. In contrast to previous studies, our study investigates the relation between loan prices, measured by the interest and fee income per dollar of loans, and the use of credit derivatives at BHCs. We propose that if BHCs use credit derivatives to hedge credit exposures, they would charge a lower loan rate to the borrowers since CDs enable banks to transfer the credit risk away from the lenders. However, if credit derivatives are used for purposes other than managing credit exposure, these instruments might not have any impact on loan pricing. Another goal of our study is to investigate the relationship between loan prices and the use of credit derivatives for trading purpose. We expect that during the years when BHCs are net sellers of credit derivatives, they take these positions because they have good quality loans and they are willing to take additional risk. In this case, they would report lower income per dollar of loans. However, if banks sell CDs as part of their speculative strategy, their use of credit derivatives might not have any impact on loan prices. Thus, banks would charge a rate that is similar to other banks with the same level of risk. Another goal of our study is to find, for both users and non-users of credit derivatives, how the interest and fee income generated by the BHCs is affected by the risk of default of their clients. We expect that as the risk of default increases, the prices on loans would increase as well. Banks take additional risk in exchange for higher return. Our final goal of this study is to investigate whether the use of CDs affects the supply of funds or loan rates differently for different types of loans banks hold in their portfolios. Our findings suggest that the loan prices of users of CDs are significantly less than the loan prices of nonusers. This finding may suggest that users are more efficient, competitive and diversified than nonusers and thus can afford to charge a lower rate to their clients. The result may also suggest that BHCs that are using CDs generally have lower risk loan portfolios and these portfolios are generating lower income per dollar of assets. Among the users group, we observe that as the volume of CDs purchased increases the prices of loans also increase. This suggests additional usage of CDs allows users to accept risky loans that they would not accept in the absence of CDs. They are initiating these high-risk loans to generate higher interest and fee income and at the same time they are using more CDs to hedge these risky loans. Our study also finds a significant and positive relationship between the risk of default and BHCs loan prices. Our study further investigates the users of credit derivatives during the years when these banks use CDs and the years when they do not use CDs. We find that the loan prices are marginally lower for the years when CDs are used. In particular, we find a significant decrease in prices during the years when these banks are sellers of CDs. However, we do not find any significant impact on loan prices during the years when they buy CDs. This result suggests that CD-active BHCs that buy CD protection are doing so to reduce some excessive risk they have taken without demanding a high rate to compensate for this risk. Finally, we find that the years when BHCs report both CDs bought and CDs sold, they charge a loan price that is similar to the years when these banks do not report any position in the CDs market. Perhaps the BHCs that report simultaneously CDs bought and CDs sold are selling CDs to generate income and hedging their positions through buying offsetting positions. Our analysis also suggests that the impact of the use of derivatives varies depending on whether the loans are real estate, consumer, commercial and industrial, agricultural, or foreign loans.

Credit derivatives, some of the most significant developments is the financial industry, have experienced significant growth recently. The objective of this study is to examine whether the use of credit derivatives, either buying or selling, has an effect on banks loan pricing behaviour. Minton et al. (2009) propose that the net buyers of credit protection save capital and thus should be able to make loans at rates that are below the rates offered by competitors who do not utilize credit derivatives. In addition, Hirtle (2009) investigates the relationship between credit derivatives and their effects on bank lending activities. She does not find a strong association between the use of credit derivative and the supply of loans and proposes that banks are using credit derivatives mainly to provide longer maturity and lower spread loans rather than to increase the volume of loans. In contrast to previous studies, our study investigates the relation between loan prices, measured by the interest and fee income per dollar of loans, and the use of credit derivatives at BHCs. We propose that if BHCs use credit derivatives to hedge credit exposures, they would charge a lower loan rate to the borrowers since CDs enable banks to transfer the credit risk away from the lenders. However, if credit derivatives are used for purposes other than managing credit exposure, these instruments might not have any impact on loan pricing. Another goal of our study is to investigate the relationship between loan prices and the use of credit derivatives for trading purpose. We expect that during the years when BHCs are net sellers of credit derivatives, they take these positions because they have good quality loans and they are willing to take additional risk. In this case, they would report lower income per dollar of loans. However, if banks sell CDs as part of their speculative strategy, their use of credit derivatives might not have any impact on loan prices. Thus, banks would charge a rate that is similar to other banks with the same level of risk. Another goal of our study is to find, for both users and non-users of credit derivatives, how the interest and fee income generated by the BHCs is affected by the risk of default of their clients. We expect that as the risk of default increases, the prices on loans would increase as well. Banks take additional risk in exchange for higher return. Our final goal of this study is to investigate whether the use of CDs affects the supply of funds or loan rates differently for different types of loans banks hold in their portfolios. Our findings suggest that the loan prices of users of CDs are significantly less than the loan prices of nonusers. This finding may suggest that users are more efficient, competitive and diversified than nonusers and thus can afford to charge a lower rate to their clients. The result may also suggest that BHCs that are using CDs generally have lower risk loan portfolios and these portfolios are generating lower income per dollar of assets. Among the users group, we observe that as the volume of CDs purchased increases the prices of loans also increase. This suggests additional usage of CDs allows users to accept risky loans that they would not accept in the absence of CDs. They are initiating these high-risk loans to generate higher interest and fee income and at the same time they are using more CDs to hedge these risky loans. Our study also finds a significant and positive relationship between the risk of default and BHCs loan prices. Our study further investigates the users of credit derivatives during the years when these banks use CDs and the years when they do not use CDs. We find that the loan prices are marginally lower for the years when CDs are used. In particular, we find a significant decrease in prices during the years when these banks are sellers of CDs. However, we do not find any significant impact on loan prices during the years when they buy CDs. This result suggests that CD-active BHCs that buy CD protection are doing so to reduce some excessive risk they have taken without demanding a high rate to compensate for this risk. Finally, we find that the years when BHCs report both CDs bought and CDs sold, they charge a loan price that is similar to the years when these banks do not report any position in the CDs market. Perhaps the BHCs that report simultaneously CDs bought and CDs sold are selling CDs to generate income and hedging their positions through buying offsetting positions. Our analysis also suggests that the impact of the use of derivatives varies depending on whether the loans are real estate, consumer, commercial and industrial, agricultural, or foreign loans.

Abstract The role of relationship banking has been the subject of intensive discussion in recent years. A large body of the literature has examined the benefits and costs related to lender-borrower relationships in small business finance. Despite the numerous studies conducted in both market-based and bank-based economies, the specific sources of the determinants of the value of relationship lending are ambiguous. However, many research results imply that a close and long-term relationship with the bank is desirable for small businesses. In this study, we investigate the sources of value in Finnish lender-borrower relationships in small business finance. We conduct three separate empirical studies that cover the following aspects of relationship banking: determinants of the value of the bank-firm relationship, collateral requirements and borrower risk, and the comparison of the different characteristics of relationship banking in bank financing and non-bank financing. We use unique and detailed credit file data from two sources, bank data from one of the largest banks in Finland and non-bank data from a large financial institution owned by the Finnish state. Both datasets cover the period 1995 to 2001. Our main findings are the following. First, duration and scope are important characteristics in determining the sources of value in the bank-firm relationship. We find that a longer relationship tends to lower the cost of the credit, and that wider scope tends to decrease the collateral requirements significantly. Second, a long-lasting bank-firm relationship is beneficial, especially to high-risk firms. As the relationship matures, loan premiums for high-risk firms decrease at a higher rate than for low-risk firms. Third, low-risk borrowers put up more collateral than high-risk borrowers, which implies the existence of a signaling effect. According to the signaling theory, low-risk firms are willing to pledge more collateral than high-risk firms. Fourth, when comparing bank and non-bank credit files, we find that bank-firm characteristics are not fully transferable to the relationship between a non-bank and a firm.

A topical issue in financial economics is the development of appropriate stochastic dynamic models for banking items and behavior. The issue here is to fulfil the need to generalize the more traditional discrete-time models of banking activity to a Levy process setting. In this thesis, under the assumption that the loan market is imperfectly competitive, we investigate the evolution of banking items such as bank assets (cash, bonds, shares, Treasuries, reserves, loans and intangible assets), liabilities (demand deposits) and bank capital (bank equity, subordinate debt and loan loss reserves). Here we consider the influence of macroeconomic factors and profitability as well as its indicators return on assets (ROA) and return on equity (ROE). As far as bank assets are concerned, we note that loan pricing models usually reflect the financial funding cost, risk premium to compensate for the risk of default by the borrower, a premium reflecting market power exercised by the bank and the sensitivity of the cost of capital raised to changes in loans extended. On the other hand, loan losses can be associated with an offsetting expense called the loan loss provision (LLP), which is charged against Nett profit. This offset will reduce reported income but has no impact on taxes, although when the assets are finally written off, a tax-deductible expense is created. An important factor influencing loan loss provisioning is regulation and supervision. Measures of capital adequacy are generally calculated using the book values of assets and equity. The provisioning of loans and their associated write-offs will cause a decline in these capital adequacy measures, and may precipitate increased regulation by bank authorities. Greater level of regulation generally entail additional costs for the bank. Currently, this regulation mainly takes the form of the Basel II Capital Accord that has been implemented on the worldwide basis since 2008. It is clear that bank profitability is a major indicator of financial crises for households, companies and financial institutions. An example of this from the 2007-2008 subprime mortgage crisis (SMC) is the U.S. bank, Wachovia Corp., who reported a big loss as from the first quarter of 2007 and eventually was bought by the world's largest bank, Citigroup, on 29 September 2008. A further example from the SMC is that both the failure of the Lehman Brothers investment bank and the acquisition in September 2008 of Merrill Lynch and Bear Stearns by Bank of America and JP Morgan Chase, respectively, were preceded by a decrease in profitability and an increase in the price of loans and loan losses. The subprime mortgage crisis is characterized by contracted liquidity in the global credit markets and banking system. The level of liquidity in the banking sector affects the ability of banks to meet commitments as they become due without incurring substantial losses from liquidating less liquid assets. Liquidity, therefore, provides the defensive cash or near-cash resources to cover banks' liability. An undervaluation of real risk in the subprime market is cascading, rippling and ultimately severely adversely affecting the world economy. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects tumbled as the US housing market slumped. Banks worldwide are hoarding cash and showing a growing reluctance to lend, driving rates that institutions charge to each other on loans to record highs. Also, global money markets are inoperative, forcing increased injections of cash from central banks. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and regulatory framework. The stochastic dynamics of the aforementioned banking items assist in formulating a maximization problem that involves endogenous variables such as profit consumption, the value of the bank's investment in loans and provisions for loan losses as control variants. In particular, we demonstrate that the bank is able to maximize its expected utility of discounted profit consumption over a random time interval, [t,r], and terminal profit at time r. Here the term profit consumption refers to the consumption of the bank's profits by dividend payments on equity and interest and principal payments on subordinate debt. The associated Hamilton-Jacobi-Bellman (HJB) equation has a smooth solution when the optimal controls are computed by means of power, logarithmic and exponential utility functions. This enables us to make a direct comparison between the economic properties of the solutions for different choices of the utility function. In keeping with the main theme of this thesis, we simulate the financial indices ROE and ROA that are two measures of bank profitability. We further discuss optimization with power utility where we show the convergence of the Markov Chain Approximation Method (MCAM) and the impact of varying the model parameters in the form of loan loss severity, P, and loan loss frequency, <f>. We investigate the connections between the banking models and Basel II capital accord as well as the current subprime mortgage crises. As a way of conclusion, we provide remarks about the main issues discussed in the thesis and speculate about future research directions. The contents of this thesis is based on 3 peer-reviewed journal articles (see [105], [106] and [107]) and 1 peer-reviewed conference proceedings paper (see [104]). In addition, the paper [108] is currently being prepared for submission to an accredited journal. / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2009.

A topical issue in financial economics is the development of appropriate stochastic dynamic models for banking items and behavior. The issue here is to fulfil the need to generalize the more traditional discrete-time models of banking activity to a Levy process setting. In this thesis, under the assumption that the loan market is imperfectly competitive, we investigate the evolution of banking items such as bank assets (cash, bonds, shares, Treasuries, reserves, loans and intangible assets), liabilities (demand deposits) and bank capital (bank equity, subordinate debt and loan loss reserves). Here we consider the influence of macroeconomic factors and profitability as well as its indicators return on assets (ROA) and return on equity (ROE). As far as bank assets are concerned, we note that loan pricing models usually reflect the financial funding cost, risk premium to compensate for the risk of default by the borrower, a premium reflecting market power exercised by the bank and the sensitivity of the cost of capital raised to changes in loans extended. On the other hand, loan losses can be associated with an offsetting expense called the loan loss provision (LLP), which is charged against Nett profit. This offset will reduce reported income but has no impact on taxes, although when the assets are finally written off, a tax-deductible expense is created. An important factor influencing loan loss provisioning is regulation and supervision. Measures of capital adequacy are generally calculated using the book values of assets and equity. The provisioning of loans and their associated write-offs will cause a decline in these capital adequacy measures, and may precipitate increased regulation by bank authorities. Greater level of regulation generally entail additional costs for the bank. Currently, this regulation mainly takes the form of the Basel II Capital Accord that has been implemented on the worldwide basis since 2008. It is clear that bank profitability is a major indicator of financial crises for households, companies and financial institutions. An example of this from the 2007-2008 subprime mortgage crisis (SMC) is the U.S. bank, Wachovia Corp., who reported a big loss as from the first quarter of 2007 and eventually was bought by the world's largest bank, Citigroup, on 29 September 2008. A further example from the SMC is that both the failure of the Lehman Brothers investment bank and the acquisition in September 2008 of Merrill Lynch and Bear Stearns by Bank of America and JP Morgan Chase, respectively, were preceded by a decrease in profitability and an increase in the price of loans and loan losses. The subprime mortgage crisis is characterized by contracted liquidity in the global credit markets and banking system. The level of liquidity in the banking sector affects the ability of banks to meet commitments as they become due without incurring substantial losses from liquidating less liquid assets. Liquidity, therefore, provides the defensive cash or near-cash resources to cover banks' liability. An undervaluation of real risk in the subprime market is cascading, rippling and ultimately severely adversely affecting the world economy. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects tumbled as the US housing market slumped. Banks worldwide are hoarding cash and showing a growing reluctance to lend, driving rates that institutions charge to each other on loans to record highs. Also, global money markets are inoperative, forcing increased injections of cash from central banks. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and regulatory framework. The stochastic dynamics of the aforementioned banking items assist in formulating a maximization problem that involves endogenous variables such as profit consumption, the value of the bank's investment in loans and provisions for loan losses as control variants. In particular, we demonstrate that the bank is able to maximize its expected utility of discounted profit consumption over a random time interval, [t,r], and terminal profit at time r. Here the term profit consumption refers to the consumption of the bank's profits by dividend payments on equity and interest and principal payments on subordinate debt. The associated Hamilton-Jacobi-Bellman (HJB) equation has a smooth solution when the optimal controls are computed by means of power, logarithmic and exponential utility functions. This enables us to make a direct comparison between the economic properties of the solutions for different choices of the utility function. In keeping with the main theme of this thesis, we simulate the financial indices ROE and ROA that are two measures of bank profitability. We further discuss optimization with power utility where we show the convergence of the Markov Chain Approximation Method (MCAM) and the impact of varying the model parameters in the form of loan loss severity, P, and loan loss frequency, <f>. We investigate the connections between the banking models and Basel II capital accord as well as the current subprime mortgage crises. As a way of conclusion, we provide remarks about the main issues discussed in the thesis and speculate about future research directions. The contents of this thesis is based on 3 peer-reviewed journal articles (see [105], [106] and [107]) and 1 peer-reviewed conference proceedings paper (see [104]). In addition, the paper [108] is currently being prepared for submission to an accredited journal. / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2009.

This work undertakes the first comprehensive theoretical assessment of syndicated loans. It is shown that syndicated and bilateral (single lender) loans should be good substitutes in meeting a borrower's financing requirements, but that syndicated loans are more complex and impose additional risks to the parties in the way they are arranged. The existing explantions of loan syndication - that they are hybrids of private bank loans and public debt instruments, that syndication is a portfolio management tool, and that loans are syndicated where they are too large to be provided bilaterally - are unable to substantially explain both the nature of syndicated loans and practice in the loan markets. A rigorous new explanation is developed, which shows that syndication reduces the rate of lending costs, so that the return to the loan originator is greater, and the borrower's cost of financing is lower, where a loan is syndicated rather than provided bilaterally. This explanation is shown to hold in competitive loan markets and to be consistent with the observation that syndicated loans are generally larger than other loans. Incidental to this new explanation, new expressions of the return to a bank from providing a loan on a bilateral basis and from originating a syndicated loan are also developed. New algorithms are also developed for determining the distribution of the commitments from syndicate participants and thus the originator's final hold, the amount it must lend itself, where the loan is underwritten. This provides, for the first time, a rigorous basis for assessing the expected return, and the risk, for the originator of a given syndicated loan. Finally, empirical testing finds that a bank's observed lending history is significant to its decision to participate in a new syndicated loan but that predictions of participation, which are fundamental inputs into the final hold algorithms, based on this information have relatively little power. It follows that there is competitive advantage to loan originators that have access to other, private information on potential participants' lending intentions.

財務報表為制訂授信決策之重要資訊來源，而穩健會計可增加公司財務報表的資訊品質。本研究實證探討當公司採行穩健會計時，是否可降低銀行融資超貸之可能性，使銀行願意為了穩健財務報表的效益，而降低公司需支付的債務融資成本。 本研究以1997至2008年之5,507筆觀察值為研究樣本，依Beaver and Ryan（2005）之分類，將穩健會計衡量指標分為非條件式穩健會計與條件式穩健會計，分析公司會計穩健程度對銀行融資利率的影響，並探討公允價值會計是否會影響條件式穩健會計與銀行融資利率之關聯性。 本研究之主要實證結果顯示，非條件式穩健會計與條件式穩健會計皆與銀行融資利率呈負向關係；公允價值會計之採用與銀行融資利率呈負向關係，且正向影響條件式穩健會計與銀行融資利率之關聯性。非條件式穩健會計與銀行給予融資超貸之風險呈負向關係，但條件式穩健會計與銀行給予融資超貸風險之關聯性並不一致。額外之測試顯示，主要實證發現不因改採其他方式衡量銀行融資利率，或以稅前息前淨利取代稅前息前折舊前淨利衡量超貸風險而有改變。 / Financial statement is one of important resources to credit decisions making. Conservatism increases the quality of financial statement. Based on the definition of types of accounting conservatism, unconditional and conditional, proposed by Beaver and Ryan (2005), and the use of a sample of 5,507 firm-year financial data from 1997 to 2008, this study investigates conservatism effects on the over-loan risks from borrowers through bank loan pricing. The primary empirical findings indicate that a significantly negative association exits between unconditional (conditional) conservatism and bank loan pricing. In addition, a significantly negative association exits between fair-value accounting and bank loan pricing, and the adoption of fair-value accounting affect the association between conditional conservatism and bank loan pricing. Moreover, the result also shows that a significantly negative association exits between unconditional conservatism and the over-loan risks. The analysis of additional tests indicates that the primary findings held when alternative measurements of interest rates are used for proxy variables for bank loan pricing and EBIT is used for proxy variables for EBITDA.