Government intervention in response to the subprime financial crisis: The good into the pot, the bad into the crop

Breitenfellner, Bastian; Wagner, Niklas

doi:10.1016/j.irfa.2010.05.001

Cited by 50 publications

(22 citation statements)

References 20 publications

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“…(i) An increase in the asset volatility increases the bank's equity evaluated at the optimal loan rate when the amount of the distressed loan purchases is low, and has an indeterminate effect on the bank's equity when the purchase amount is high observed from the upper panel of Table 3. With a government as the lender of last resort in particular when buying distressed assets remains low, there is an incentive for the bank to increase the credit risk profile in order to obtain a higher expected payoff for shareholders (Breitenfellner and Wagner, 2010). (ii) The higher the asset volatility, the lower likely bank interest margin becomes, which is consistent with the empirical findings of Williams (2007).…”

Section: Numerical Exercisessupporting

confidence: 75%

“…One issue that has not been addressed is the optimal bank interest margin management under a design of rescue packages. For example, the Troubled Asset Relief Program is a combination of equity injections and distressed asset purchases, while most European bailout programs combine government guaranteed debt issuance programs with direct equity injections (Breitenfellner and Wagner, 2010). In particular, is it the case that the results of this paper also apply to rescue package alternatives.…”

Section: Discussionmentioning

confidence: 95%

“…(i) For a given level of buying distressed loans, the equity return with a negatively corresponding optimal margin is positively related to loan volatility. This result is understood that there is an incentive for the bank to increase the risk profile in order to obtain a higher expected equity return at a given level of bailout (Breitenfellner and Wagner, 2010). (ii) For a given level of asset variability, the equity return with a positively corresponding optimal margin is negatively related to the bailout amount of buying distressed loans.…”

Section: Numerical Exercisesmentioning

confidence: 97%

See 2 more Smart Citations

A Barrier Option Utility Framework for Bank Interest Margin under Government Bailout

Lin¹,

Jou²,

Lin³

2014

International Journal of Financial Research

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The barrier options theory of corporate security valuation is applied to the contingent claims of a distressed bank under a bailout program of distressed loan purchases. In particular, the bank acts as if it has a single utility function that positively weights equity returns like, but negatively weights bankruptcy dislike. We show that an increase in the amount of distressed loan purchases decreases the loan amount at an increased margin when buying distressed loan amount is high. Bailout as such makes the bank less prone to loan risk taking, thereby contributing the stability of the banking system. A numerical exercise shows that the market-based estimates of the expected utility of bank equity returns which ignore the weights (a standard down-and-out call option) or the dislike (a standard call option) lead to significant overestimation.

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Section: Numerical Exercisessupporting

confidence: 75%

Section: Discussionmentioning

confidence: 95%

Section: Numerical Exercisesmentioning

confidence: 97%

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A Barrier Option Utility Framework for Bank Interest Margin under Government Bailout

Lin¹,

Jou²,

Lin³

2014

International Journal of Financial Research

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“…The 2007/2008 global financial crisis has reignited the debate and, in particular, the effectiveness of corporate risk management and disclosure practices (Walker Review, 2009;Breitenfellner & Wagner, 2010;Iatridis, 2008Iatridis, , 2011. This paper, therefore, investigates the association between CG and risk reporting in the light of the 2007/2008 global financial crisis.…”

Section: Introductionmentioning

confidence: 99%

Corporate governance and risk reporting in South Africa: A study of corporate risk disclosures in the pre- and post-2007/2008 global financial crisis periods

Ntim

Lindop

Thomas

2013

International Review of Financial Analysis

336

571

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The 2007/2008 global financial crisis has reignited the debate regarding the need for effective corporate governance (CG) through sound risk management and reporting practices. This paper, therefore, examines the crucial question of whether the quality of firm-level CG has any effect on the quality and extent of corporate risk disclosures (CRD) in South Africa (SA) with particular focus on the pre-and post-2007/2008 global financial crisis period. Using one of the largest datasets to-date on CG and CRD, from 2002 to 2011, and distinctively drawing on a multiple theoretical perspective, we find that CRD are largely 'non-financial', 'historical', 'good news' and 'qualitative' in nature over the ten-year period investigated. We also find that block ownership and institutional ownership are negatively associated with the extent of CRD, whilst board diversity, board size and independent nonexecutive directors are positively related to the extent of CRD. By contrast, dual board leadership structure has no significant connection with the extent of CRD. Our results are robust across a raft of econometric models that adequately address different types of endogeneity problems, as well as alternative CG and CRD proxies. Our findings are largely consistent with the predictions of our multitheoretical framework that incorporates insights from agency, legitimacy, institutional, resourcedependence, and stakeholder theories.

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“…The "single-minded focus on profi t in isolation" addressed within King and Roberts (2013) scientifi c work, also referred to by other researchers (Berndt et al, 2014),tries to underline the role profi t maximisation has played over the years as a determinant for the 2007/2008 global fi nancial crisis (Breitenfellner and Wagner, 2010). Davis (2009), Freeman andReed (1983) cited by Berndt et al (2014) consider that fi nancial institutions cannot infl uence anymore decisions regarding company's welfare based only on shareholder value.…”

Section: Introductionmentioning

confidence: 99%

Social and Environmental Reporting as a Part of the Integrated Reporting

Turturea¹

2016

Acta Univ. Agric. Silvic. Mendelianae Brun.

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Government intervention in response to the subprime financial crisis: The good into the pot, the bad into the crop

Cited by 50 publications

References 20 publications

A Barrier Option Utility Framework for Bank Interest Margin under Government Bailout

A Barrier Option Utility Framework for Bank Interest Margin under Government Bailout

Corporate governance and risk reporting in South Africa: A study of corporate risk disclosures in the pre- and post-2007/2008 global financial crisis periods

Social and Environmental Reporting as a Part of the Integrated Reporting

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