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Journal Article
Model error
Modern finance would not have been possible without models. Increasingly complex quantitative models drive financial innovation and the growth of derivatives markets. Models are necessary to value financial instruments and to measure the risks of individual positions and portfolios. Yet when used inappropriately, the models themselves can become an important source of risk. Recently, several well-publicized instances occurred of institutions suffering significant losses attributed to model error. This has sharpened the interest in model risk among financial institutions and their regulators.> ...
Journal Article
Interest rate structure and the credit risk of swaps
Swap contracts have grown tremendously in the last decade. Most are interest-rate swaps, the simplest being an exchange of one partys fixed-rate interest payments for anothers floating-rate payments. Swaps can lower borrowing costs for both parties as well as provide a tool for managing interest-rate risk. As the market for swaps grows and matures, understanding and measuring the accompanying credit risk remains a concern of bankers, regulators, and corporate users ; The credit risk of swaps arises when one party defaults and interest rates have changed in such a way that the other party can ...
Working Paper
Failed bank resolution and the collateral crunch: the advantages of adopting transferable puts
Current methods of failed bank resolution are unnecessarily expensive for taxpayers and impose substantial costs on borrowers at failed banks. This situation is due to distorted incentives imbedded in the standard contract between the government and acquirers of failed banks, which result in more loan foreclosures than if the loan were held by a well-capitalized bank. This paper proposes a modification to the standard contract in the form of a transferable put, which would introduce market-based incentives to the disposition of failed bank assets.
Journal Article
Risk-adjusted performance of mutual funds
Mutual funds are now the preferred way for individual investors and many institutions to participate in capital markets, and their popularity has increased demand for evaluations of fund performance. Many business publications now rank mutual funds according to their performance, and information services exist specifically for this purpose. There is no general agreement, however, about how best to measure and compare fund performance and on what information funds should disclose to investors. ; Risk and performance measurement is an active area for academic research and continues to be of ...
Journal Article
The advantages of \"transferrable puts\" for loans at failed banks
In testimony on February 3, 1992 before the Committee on Banking, Housing, and Urban Affairs of the United States Senate, Richard F. Syron, President of the Federal Reserve Bank of Boston, proposed a mechanism to help relieve current credit availability problems by making existing FDIC guarantees of loans transferable throughout the private financial system. This article examines Mr. Syrons rationale for the proposal and how it might work. ; Under this scheme, when performing nonperforming loans are placed in the equivalent of "bad banks" by the FDIC, the borrower could transfer the loan to ...
Working Paper
Reverse mortgages and the liquidity of housing wealth
The article is organized as follows: Section I briefly describes the features of various types of reverse mortgages offered in the private and public sectors. Section II surveys the ~elevant literature that has focused on the savings patterns of the elderly and their demand for reverse mortgage products. Section III describes the sample of the elderly drawn from the Survey of Income and Program Participation (SIPP). Section IV analyzes the potential demand for reverse mortgages on the basis of age, fertility history, income, housing wealth, liquid wealth, and debt. Section V discusses the ...
Journal Article
Has antitrust policy in banking become obsolete?
The authors analyze the effect of bank mergers on deposit interest rates, using data on banks responding to the Federal Reserve's Monthly Survey of Selected Deposits over an 11-year period. Their results suggest that banks exercise market power in pricing money market deposits and CD's in their local markets.
Journal Article
Mutual-to-stock-conversions by New England savings banks: where has all the money gone?
In the aftermath of the real estate slump and the attendant financial troubles of the New England banks, it is natural to look for causes and contributing factors. One phenomenon that has received its share of the blame is the rush of conversions by thrifts in the mid 1980s from mutual to stock form of ownership. Conversions were hailed initially as a way to fortify the eroded capital of thrifts and increase their safety and soundness. ; This article compares the behavior of converted thrifts with that of the mutuals. It finds that converted institutions took greater risks, suffered bigger ...
Journal Article
Value at risk: new approaches to risk management
Managing risk has always been an integral part of banking. In the past two years an approach to risk management called "Value at Risk" has been accepted by both practitioners and regulators as the "right" way to measure risk, becoming a de facto industry standard. Yet, the danger is that overreliance on value at risk can give risk managers a false sense of security or lull them into complacency. Value at risk is only one of many tools of managing risk, and it is based on a number of unrealistic assumptions. There is no generally accepted way to calculate it, and various methods can yield ...
Journal Article
Should U.S. investors invest overseas?
Interest in foreign investment has been high among U.S. investors in recent years. Many investors know that geographic diversification can improve investment returns without increasing risk. However, whether or not to invest abroad and, if so, how much weight to give to foreign investment, are questions often subject to heated debate. Whether or not to invest abroad is part of the larger question of how to assemble a portfolio that is appropriate for the investor's circumstances and degree of risk tolerance. ; This article examines the question of international investing within the broader ...