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The problem of collateral is a daily issue for lenders and causes much debate in the development finance community. Given the difficulties experienced in arranging traditional forms of loan security, such as land or chattel mortgages, various collateral substitutes have been proposed. Among the substitutes for traditional collateral is the loan guarantee. Guarantee systems for loans have been proposed, planned and implemented in various countries. The assumption made by proponents of such a service is that the guarantee organization is either better informed about the risk of the loan than the lender or it is better structured financially to be able to manage the risk. Despite the apparent attractiveness of a loan guarantee, the empirical evidence available gives little encouragement. Nevertheless, interest in guarantees continues.
The book considers when governments should give guarantees to private investors. After describing the history of guarantees, and the challenges the politics and psychology create for good decisions, the book sets out a principles for allocating risk (and therefore guarantees), techniques for valuing guarantees, and rules to encourage good decisions.
Transaction reforms in eight Pacific Island countries have shown the value in ""movable"" assets such as machinery, inventory, and accounts receivable for use as collateral in borrowing. They can benefit businesses and financial institutions that offer business loans. Yet, despite these reforms, financial institutions remain unwilling to lend. Businesses still find it hard to access the credit they need to grow, which in turn creates jobs and drives the economic activity needed in the Pacific. Credit guarantees are often proposed as an instrument to overcome this problem. However, as this report finds, there is no strong theoretical justification for their use.
We study bank portfolio allocations during the transition of the real sector to a knowledge economy in which firms use less tangible capital and invest more in intangible assets. We show that, as firms shift toward intangible assets that have lower collateral values, banks reallocate their portfolios away from commercial loans toward other assets, primarily residential real estate loans and liquid assets. This effect is more pronounced for large and less well capitalized banks and is robust to controlling for real estate loan demand. Our results suggest that increased firm investment in intangible assets can explain up to 20% of bank portfolio reallocation from commercial to residential lending over the last four decades.
Young people, hardest hit by the global economic downturn, are speaking out and demanding change. F&D looks at the need to urgently address the challenges facing youth and create opportunities for them. Harvard professor David Bloom lays out the scope of the problem and emphasizes the importance of listening to young people in "Youth in the Balance." "Making the Grade" looks at how to teach today's young people what they need to get jobs. IMF Deputy Managing Director, Nemat Shafik shares her take on the social and economic consequences of youth unemployment in our "Straight Talk" column. "Scarred Generation" looks at the effects the global economic crisis had on young workers in advanced economies, and we hear directly from young people across the globe in "Voices of Youth." Renminbi's rise, financial system regulation, and boosting GDP by empowering women. Also in the magazine, we examine the rise of the Chinese currency, look at the role of the credit rating agencies, discuss how to boost the empowerment of women, and present our primer on macroprudential regulation, seen as increasingly important to financial stability. People in economics - C. Fred Bergsten, American Globalist. Back to basics - The multi-dimensional role of banks in our financial systems.
A number of practical implications and issues can arise in the daily functioning of independent (first demand) guarantees and standby letters of credit. Bank Guarantees in International Trade provides a comprehensive, highly readable study of the legal and practical aspects and implications of these instruments, broadening the reader's understanding of the law on the subject. This work comprises all reported case law from the Netherlands, Germany, France, The United Kingdom, and Belgium and also takes into account the law in certain other European countries And The United States. it examines the governing law of bank guarantees in numerous regions, particularly within the Middle East and North Africa. The Appendix includes, among other materials, The text of the 1992 ICC Uniform Rules for Demand Guarantees, The 1995 UNCITRAL Convention, and many sample texts. Its transnational perspective enhances the value of this work, making it useful in other jurisdictions. This second edition contains thoroughly revised, updated, and amended material which reflects new developments in the law and changing patterns in practice and accounts For The introduction of new techniques and problem areas. Bankers and lawyers in particular will find Bank Guarantees in International Trade an insightful and informative work.
A thoughtful and thought generating overview of what ails the banking sector and a reminder that the purpose of banks is to help create economic growth.
Black and Scholes (1973) and Merton (1974) (hereafter referred to as BSM) introduced the contingent claim approach (CCA) to the valuation of corporate debt and equity. The BSM modeling framework is also named the 'structural' approach to risky debt valuation. The CCA approach considers all stakeholders of the corporation as holding contingent claims on the assets of the corporation. Each claim holder has different priorities, maturities and conditions for payouts. It is based on the principle that all the assets belong to all the liability holders.In the structural approach the arrival of the default event relies on economic arguments for why firms default as it is explicitly related to the dynamics of the economic value of the firm. A standard structural model of default timing assumes that a corporation defaults when its assets drop to a sufficiently low level relative to its liabilities.The BSM modeling framework gives the basic fundamental version of the structural model where default is assumed to occur when the net asset value of the firm at the maturity of the pure-discount debt becomes negative, i.e., market value of the assets of the firm falls below the market value of the firm's liabilities. In a regime of limited liability, the shareholders of the firm have the option to default on the firm's debt. Equity can be viewed as a European call option on the firm's assets with a strike price equal to the face value of the firm's debt. Actually, CCA can be used to value all the components of the firm's liabilities. Option pricing models are used to value stocks, bonds, and many other types of corporate claims.Different versions of the model correspond to different assumptions about the conditions when a firm defaults. Merton (1974) assumes that the firm only defaults at the maturity date of the firm's outstanding debt when the net asset value of the firm, in market value terms, is negative. Others introduce other conditions for default. Also, different authors introduce more complicated capital structure with different kinds of bonds (e.g. senior and junior), warrants, corporate taxes, ESOP, and more. Volume 1: Foundations of CCA and Equity ValuationVolume 1 presents the seminal papers of Black and Scholes (1973) and Merton (1973, 1974). This volume also includes papers that specifically price equity as a call option on the corporation. It introduces warrants, convertible bonds and taxation as contingent claims on the corporation. It highlights the strong relationship between the CCA and the Modigliani-Miller (M&M) Theorems, and the relation to the Capital Assets Pricing Model (CAPM). Volume 2: CCA Approach to Corporate Debt ValuationVolume 2 concentrates on corporate bond valuation by introducing various types of bonds with different covenants as well as introducing various conditions that trigger default. While empirical evidence indicates that the simple Merton's model underestimates the credit spreads, additional risk factors like jumps can be used to resolve it. Volume 3: Issues in Corporate Finance with CCA ApproachVolume 3 includes papers that look at issues in corporate finance that can be explained with the CCA approach. These issues include the effect of dividend policy on the valuation of debt and equity, the pricing of employee stock options and many other issues of corporate governance. Volume 4: CCA Approach to Banking and Financial IntermediationVolume 4 focuses on the application of the contingent claim approach to banks and other financial intermediaries. Regulation of the banking industry led to the creation of new financial securities (e.g., CoCos) and new types of stakeholders (e.g., deposit insurers).