Banking Practices 6th Annual Banking Research Conference FDIC

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Banking Practices6th Annual Banking Research
ConferenceFDIC JFSR

• Discussion by
• Mitchell A. Petersen
• Kellogg School of Management
• National Bureau of Economic Research

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Role of Banks

• Banks 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

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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

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On Loan Sales Interpreting the Findings

• Covenants More Binding On Sold Loans
• Less Slack ? Increase ProbSale
• 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

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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

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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?

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Capital Constraintsin Banking Holod Peek

• Firms 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)

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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

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Summary

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