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Banking Practices 6 th Annual Banking Research Conference FDIC & JFSR

Banking Practices 6 th Annual Banking Research Conference FDIC & JFSR. Discussion by Mitchell A. Petersen Kellogg School of Management & National Bureau of Economic Research. Role of Banks. Bank’s Special Skills: Information collection and processing for capital provision Challenges:

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Banking Practices 6 th Annual Banking Research Conference FDIC & JFSR

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  1. Banking Practices6th Annual Banking Research ConferenceFDIC & JFSR Discussion by Mitchell A. Petersen Kellogg School of Management & National Bureau of Economic Research

  2. Role of Banks • Bank’s Special Skills: Information collection and processing for capital provision • Challenges: • Limited internal capital -- relative to projects • Expanding pool of capital when other lenders know bank has more information • Solutions • Loan sales, syndication, underwriting, VC • Internal capital markets

  3. On Loan Sales… Drucker & Puri • Problem: Funding Loans w/ Limited Capital and Possibly Private Info • Solution • Seller Knows Nothing: Credit Scoring • Contracting Solutions: Covenants • Loan sales & syndication • Loan selection: Sell Only Safe Loans • Covenants matter for both

  4. On Loan Sales… Interpreting the Findings • Covenants More Binding On Sold Loans • Less Slack  Increase Prob[Sale] • Net Worth: Current Level or Covenant • Information Asymmetry vs. Governance • Loan Ratings Increase Loan Sales (Sufi, ’06) • Ratings Matter & Magnitude is Large (Table 4) • Rating  0.67 • # of Covenants or Net Worth Slack  0.24 - 0.28 • Governance Rules of Non-Bank Buyers

  5. Banks and Bubbles: Gonzalez and James • Who Has a Banking Relationship? • Sources of Capital. If Not A bank, Then? • Finance company, Internal capital (NSSBF) • Venture capitalists • Which Firms Does The Bank Choose? • Safe and VC backed • Not Your Average Bank • Silicon Valley Bank & Imperial Bank: 44%

  6. Banks and Bubbles (cont) • Banking Relation  Better Performance • Operating Cash Flow (EBITDA) • Survival • Post-IPO yes, but pre-IPO? • Equity Return Performance • Implications • Valuation or Timing of CF ? • Low Cash Flow or High Investment • Banks Pick Winners or Banks Make Winners?

  7. Capital Constraints…in Banking: Holod & Peek • Firm’s Financial Problem: • Internal Capital Is Insufficient (& External Capital is Expensive) • Research Question: • How Do Firms (Banks) Solve Problem? • Financial Solutions • Internal Capital (Assume Ext. Is Expensive) • Move Projects (always assumed away)

  8. Capital Constraints… (cont) • Organization Structure Implications • Diversification is Good (Geography, Indst) • MBHC buy and sell more loans • MBHC create value? • Diversification w/out MBHC • Role of Public Capital Markets

  9. Summary • Tie Results of Papers Together (??) • Examine Similar Market Frictions • A Wide Variety of Solutions • Emerging Style of Research

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