Financial Institutions at Universität St. Gallen | Flashcards & Summaries

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Lernmaterialien für Financial Institutions an der Universität St. Gallen

Greife auf kostenlose Karteikarten, Zusammenfassungen, Übungsaufgaben und Altklausuren für deinen Financial Institutions Kurs an der Universität St. Gallen zu.

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Credit Analysis - Capacity

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Expected cash flow of the borrower and how related to the instalment of loa

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Conclusion: State Guarantees & Bank Lending (pros & cons)


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PRO

CON

State loan guarantees reduce credit loss directly (“buffer” function), even better than collateral does:

Contrary to normal collateral, which gives borrowers “skin in the game”, government loan guarantees do not mitigate pre-contractual private information (screening function) nor post-contractual moral hazard (incentive function)

 Credit supply ↑

Credit risk ↑ and is shifted to the government 

Loan volume ↑and interest rates↓

 

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Lending by Government-Owned Banks / Empirical Study


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  1. State-owned banks charge lower interest rates (subsidized lending)
  2. They mostly favour large firms & firms located in depressed areas
  3. Lending behaviour affected by the electoral results of the party associated with the bank: the stronger the political party in the area where the firm is borrowing, the lower the interest rates charged (study carried in Italy)
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​Loan contract elements include:

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  • Financial obligations of the lender (principal / credit limit)
  • Financial obligations of the borrower (interest, collateral, equity)
  • Warranties
  • Covenants
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COVID-19 & Credit Analysis -> Dimensions Impact

Capital


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Asset value on balance sheet↓(e.g. fixed assets, inventory, accounts receivable)

 ---> residual equity ↓

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Borrower Incentives - Guaranteed loans


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Not worried to lose capital -> therefore low incentives for a high effort 

--> negative selection effect - attract even riskier borrowers bc no collateral to lose and no credit analysis is performed on behalf of the bank

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Financial Intermediaries

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  • Entities that intermediate btw providers and users of financial capital
  • Typically hold large quantities of financial claims as assets
  • More leveraged than non-financial firms (financial liabilities)
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FIs on the periphery 


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--> specialist FIs which are on the periphery

E.g. pawnbrokers  & payday lenders (provide short-term loans to consumers) / loan sharks and other information lenders in the economy

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Role of gov-owned banks during the last financial crisis


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  • Lending by state banks is less procyclical vs private banks -> in high income countries it is even countercyclical --> On liability side  no big expansion their total liabilities during booms --> Report loan non-performance more evenly over business cycle
  • Play a useful role in stabilizing credit over the business cycle as well as during periods of financial instability – stabilizing effect, less likely to cut lending
  • BUT track records remains quite poor 
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Loan Structure of Banks (US & Switzerland)


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  • Majority: mortgage loans between 60-80% (80% is for regional banks)
  • Mortgage can be given to households & small businesses (e.g. entrepreneurs can mortgage their house – quite common in continental Europe)
  • Households make up roughly 60% of the total loan book and among household plans, mortgages make up 86%
    • Consumer credit : 10-15% of US commercial bank loans
    • Commercial and Industrial loans make up roughly 25% of US commercial bank loans
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Hedging credit risk with swaps (off-bs management)

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Credit Default Swap

  • like insurance contract
  • protection buyer makes regular payment to protection seller
  • protection seller makes payment only in the case of a default on a particular bond 
  • > Buy protection against potential default of that concentrated firm - engage in insurance /Swap contract -> make regular payments to an insurance company or Investment bank   If firm did default -> would receive payment from the protection seller on the swap -Hedge by receiving off BS credit payments (hence hedged credit risk without changing the composition of the loan portfolio)
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Firms’ participation in the COVID-19 loan programme - Paper


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  •  Analyses the determinants of firm participation in the Swiss COVID-19 loan programme, which aims to bridge firms' liquidity shortfalls that have resulted from the pandemic. 
  •  State guaranteed COVID-19 loans are widely used by Swiss firms, with 20% of all firms participating, resulting in a sizeable programme of 2.4% of GDP. 
  •  Results:
    • Participation was largely driven by the exposure of a firm to lockdown restrictions and to the intensity of the virus in the specific region. 
    • Less liquid firms had a significantly higher probability of participating in the programme. 
    • No clear evidence that firm indebtedness affected participation in the programme and no evidence that pre-existing potential zombie firms participated more strongly in the loan programme. 
    • The programme reached younger and smaller firms, which could be financially more vulnerable as they are less likely to obtain outside finance during a crisis. 
  • Overall, we conclude that given its objective, the programme appears to be successful.
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Q:

Credit Analysis - Capacity

A:

Expected cash flow of the borrower and how related to the instalment of loa

Q:

Conclusion: State Guarantees & Bank Lending (pros & cons)


A:

PRO

CON

State loan guarantees reduce credit loss directly (“buffer” function), even better than collateral does:

Contrary to normal collateral, which gives borrowers “skin in the game”, government loan guarantees do not mitigate pre-contractual private information (screening function) nor post-contractual moral hazard (incentive function)

 Credit supply ↑

Credit risk ↑ and is shifted to the government 

Loan volume ↑and interest rates↓

 

Q:

Lending by Government-Owned Banks / Empirical Study


A:
  1. State-owned banks charge lower interest rates (subsidized lending)
  2. They mostly favour large firms & firms located in depressed areas
  3. Lending behaviour affected by the electoral results of the party associated with the bank: the stronger the political party in the area where the firm is borrowing, the lower the interest rates charged (study carried in Italy)
Q:

​Loan contract elements include:

A:
  • Financial obligations of the lender (principal / credit limit)
  • Financial obligations of the borrower (interest, collateral, equity)
  • Warranties
  • Covenants
Q:

COVID-19 & Credit Analysis -> Dimensions Impact

Capital


A:

Asset value on balance sheet↓(e.g. fixed assets, inventory, accounts receivable)

 ---> residual equity ↓

Mehr Karteikarten anzeigen
Q:

Borrower Incentives - Guaranteed loans


A:

Not worried to lose capital -> therefore low incentives for a high effort 

--> negative selection effect - attract even riskier borrowers bc no collateral to lose and no credit analysis is performed on behalf of the bank

Q:

Financial Intermediaries

A:
  • Entities that intermediate btw providers and users of financial capital
  • Typically hold large quantities of financial claims as assets
  • More leveraged than non-financial firms (financial liabilities)
Q:

FIs on the periphery 


A:

--> specialist FIs which are on the periphery

E.g. pawnbrokers  & payday lenders (provide short-term loans to consumers) / loan sharks and other information lenders in the economy

Q:

Role of gov-owned banks during the last financial crisis


A:
  • Lending by state banks is less procyclical vs private banks -> in high income countries it is even countercyclical --> On liability side  no big expansion their total liabilities during booms --> Report loan non-performance more evenly over business cycle
  • Play a useful role in stabilizing credit over the business cycle as well as during periods of financial instability – stabilizing effect, less likely to cut lending
  • BUT track records remains quite poor 
Q:

Loan Structure of Banks (US & Switzerland)


A:
  • Majority: mortgage loans between 60-80% (80% is for regional banks)
  • Mortgage can be given to households & small businesses (e.g. entrepreneurs can mortgage their house – quite common in continental Europe)
  • Households make up roughly 60% of the total loan book and among household plans, mortgages make up 86%
    • Consumer credit : 10-15% of US commercial bank loans
    • Commercial and Industrial loans make up roughly 25% of US commercial bank loans
Q:

Hedging credit risk with swaps (off-bs management)

A:

Credit Default Swap

  • like insurance contract
  • protection buyer makes regular payment to protection seller
  • protection seller makes payment only in the case of a default on a particular bond 
  • > Buy protection against potential default of that concentrated firm - engage in insurance /Swap contract -> make regular payments to an insurance company or Investment bank   If firm did default -> would receive payment from the protection seller on the swap -Hedge by receiving off BS credit payments (hence hedged credit risk without changing the composition of the loan portfolio)
Q:

Firms’ participation in the COVID-19 loan programme - Paper


A:
  •  Analyses the determinants of firm participation in the Swiss COVID-19 loan programme, which aims to bridge firms' liquidity shortfalls that have resulted from the pandemic. 
  •  State guaranteed COVID-19 loans are widely used by Swiss firms, with 20% of all firms participating, resulting in a sizeable programme of 2.4% of GDP. 
  •  Results:
    • Participation was largely driven by the exposure of a firm to lockdown restrictions and to the intensity of the virus in the specific region. 
    • Less liquid firms had a significantly higher probability of participating in the programme. 
    • No clear evidence that firm indebtedness affected participation in the programme and no evidence that pre-existing potential zombie firms participated more strongly in the loan programme. 
    • The programme reached younger and smaller firms, which could be financially more vulnerable as they are less likely to obtain outside finance during a crisis. 
  • Overall, we conclude that given its objective, the programme appears to be successful.
Financial Institutions

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