The Journal of Finance

Are Banks Still Special When There Is a Secondary Market for Loans?

Published: 09/12/2012   |   DOI: 10.1111/j.1540-6261.2012.01769.x

AMAR GANDE, ANTHONY SAUNDERS

Secondary market trading in loans elicits a significant positive stock price response by a borrowing firm's equity investors. We find the major reason for this response is the alleviation of borrowing firms’ financial constraints. We also find that new loan announcements are associated with a positive stock price effect even when prior loans made to the same borrower already trade on the secondary market. We conclude that the special role of banks has changed due to their ability to create an active secondary loan market while simultaneously maintaining their traditional role as information producers.

A Catastrophe Model of Bank Failure

Published: 12/01/1980   |   DOI: 10.1111/j.1540-6261.1980.tb02203.x

THOMAS HO, ANTHONY SAUNDERS

Most models of bank failure have assumed that the path towards bankruptcy or insolvency is smooth and continuous. As a consequence a number of early‐warning systems have been suggested in the banking and financial literature to aid regulators in the identification of potential problem banks. However, these systems may be of little use when the path towards failure is explosive, involving a sudden crash or catastrophe. This paper seeks to examine such cases by applying the theory of catastrophes to bank failure. A model is developed to show how the interaction between bank management, regulators and depositors can induce catastrophic failure. It is argued that there is a crucial relationship between the power of regulatory intervention and depositors confidence levels which is both necessary and sufficient for catastrophe to occur. It is also argued that catastrophe appears to be more likely for large money market banks rather than small banks. Finally, some suggestions are made for regulatory policy and for further research in the area.

Financial Distress and Bank Lending Relationships

Published: 02/12/2003   |   DOI: 10.1111/1540-6261.00528

Sandeep Dahiya, Anthony Saunders, Anand Srinivasan

We use a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers suffer financial distress. We find a significant negative announcement return for the lead lending bank when a major corporate borrower announces default or bankruptcy. Banks with higher exposure to the distressed firm have larger negative announcement‐period returns. The existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, financial distress also has a significant negative effect on borrower's returns.

Returns and Risks of U.S. Bank Foreign Currency Activities

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04530.x

THEOHARRY GRAMMATIKOS, ANTHONY SAUNDERS, ITZHAK SWARY

In this paper the risks and returns on U.S. banks' foreign currency positions are analyzed in a portfolio setting when both exchange rate and foreign interest rate risks are present. It is shown that U.S. banks could achieve considerable reductions in risk by optimally selecting their foreign currency positions. Actual foreign currency portfolio returns generated from expected exchange rate changes and exchange rate surprises were positive on average but those generated from interest rate surprises were negative. Although the total portfolio returns were positive, on a risk‐adjusted basis bank return performance was relatively poor. Nevertheless, despite this relatively poor performance, the risk of ruin or failure for a “representative bank” from foreign currency activities was found to be approximately zero when judged in comparison to the capital funds available to large money center banks to cushion such losses.

A Micro Model of the Federal Funds Market

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05026.x

THOMAS S. Y. HO, ANTHONY SAUNDERS

This paper demonstrates that valuable insights into the determination of Federal funds rates can be gained through modeling the micro‐decisions of market participants. Fed fund demand functions are derived for different bank valuation functions and several implications are discussed. Specifically, it is: (i) possible to rationalize the observation that large banks are net purchasers and small banks net sellers of Fed funds; (ii) to explain the positive spread of Fed funds rates over other short‐term money market rates; and (iii) to link the size of this spread to the Federal Reserve's underlying monetary policy strategy.

The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees

Published: 05/01/2015   |   DOI: 10.1111/jofi.12281

TOBIAS BERG, ANTHONY SAUNDERS, SASCHA STEFFEN

More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lines and the cancellation option in term loans, and (2) fees are used to screen borrowers based on the likelihood of exercising these options. We also propose a new total‐cost‐of‐borrowing measure that includes various fees charged by lenders.

Asymmetry of Information, Regulatory Lags and Optimal Incentive Contracts: Theory and Evidence

Published: 05/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02245.x

RICHARD S. BOWER, KOSE JOHN, ANTHONY SAUNDERS

Ownership Structure, Deregulation, and Bank Risk Taking

Published: 06/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb03709.x

ANTHONY SAUNDERS, ELIZABETH STROCK, NICKOLAOS G. TRAVLOS

This paper investigates the relationship between bank ownership structure and risk taking. It is hypothesized that stockholder controlled banks have incentives to take higher risk than managerially controlled banks and that these differences in risk become more pronounced in periods of deregulation. In support of this hypothesis, we show that stockholder controlled banks exhibit significantly higher risk taking behavior than managerially controlled banks during the 1979–1982 period of relative deregulation.

Managers, Owners, and The Pricing of Risky Debt: An Empirical Analysis

Published: 06/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb05148.x

ELIZABETH STROCK BAGNANI, NIKOLAOS T. MILONAS, ANTHONY SAUNDERS, NICKOLAOS G. TRAVLOS

This article examines managerial ownership structure and return premia on corporate bonds. It is argued that when managerial ownership is low, an increase in managerial ownership increases management's incentives to increase stockholder wealth at the expense of bondholder wealth. When ownership increases more, however, it is argued that management becomes more risk averse, with incentives more closely aligned with bondholders. This study finds a positive relation between managerial ownership and bond return premia in the low to medium (5 to 25 percent) ownership range. There is also weak evidence for a nonpositive relation in the large (over 25 percent) ownership range.