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CAN MICROFINANCE REDUCE
PORTFOLIO VOLATILITY? Nicolas Kraussa and Ingo
Walter Microfinance is arguably one of the
most effective techniques for poverty alleviation in developing countries.
Although traditionally supported by nongovernmental organizations and
socially-oriented investors, microfinance has increasingly demonstrated its
value on a stand-alone basis, typically exhibiting low default rates combined
with attractive returns, encouraging greater commercial involvement. This
paper addresses a related issue – whether microfinance represents a distinct
financial asset class, thereby forming the basis for access to global capital
markets and performance-driven investors in their search for efficient
portfolios. Our empirical tests generally show very low correlations between
the performance of microfinance institutions and global and national market
performance measures, suggesting that microfinance portfolios may constitute
a distinct asset class that can have useful portfolio diversification value. Keywords: microfinance, systemic
risk, poverty alleviation. JEL Classification: G21, O16. Paper can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=943786 DO FINANCIAL CONGLOMERATES
CREATE OR DESTROY Markus M. Schmid and Ingo
Walter This paper attempts to ascertain
whether or not functional diversification is value-enhancing or
value-destroying in the financial services sector. Based on a U.S. dataset
comprising approximately 4060 observations covering the period 1985-2004, we
report a substantial and persistent conglomerate discount among financial
intermediaries. Our results suggest that it is diversification that causes
the discount, and not that troubled firms diversify into other more promising
areas. We also investigate the geographic dimension of diversification as
well as the interaction between geographic scope and functional
diversification and find that the value-destruction associated with
functional diversification is not apparent in geographic diversification. A
further finding is that there is a significant premium for the very largest
of our sample firms (with total assets above 100bn USD) indicating that there
are "too big to fail" guarantees for very large financial
conglomerates. Keywords: Diversification; Focus;
Organizational structure; Financial sector; Firm valuation. JEL
Classification: G20, G32, G34. Paper can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=929160. REPUTATIONAL RISK AND
CONFLICTS OF INTEREST IN BANKING AND FINANCE: THE EVIDENCE SO FAR Ingo Walter This paper attempts define reputational
risk in financial intermediation and to identify the proximate sources of reputational risk facing financial services firms. It
then considers the key drivers of reputational risk
in the presence of transactions costs and imperfect information in financial
markets, surveys empirical research in the literature on the impact of reputational losses imposed on financial intermediaries,
and presents some new empirical findings. The paper then develops the link
between reputational risk and exploitation of
conflicts of interest in financial intermediation, arguably one of the most
important threats to the reputational capital of
financial firms. Finally, it considers some managerial requisites for dealing
with both reputational risk and conflicts of
interest. Keywords: Operational Risk, Reputation, Conflicts of
Interest. JEL Classification: G2, K2, L14. Paper can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952682. THE ASSET
MANAGEMENT INDUSTRY IN ASIA: DYNAMICS OF
GROWTH, STRUCTURE AND PERFORMANCE Ingo Walter and Elif Sisli We examine the industrial
organization and institutional development of the asset management industry
in Asian developing economies – specifically in China, Indonesia, Korea,
Malaysia, Singapore, Philippines and Thailand. We focus on the size and
growth of the buy-side of the respective financial markets, asset allocation,
the regulatory environment, and the state of internationalization of the fund
management industry in its key components – mutual funds, pension funds and
asset management for high net worth individuals. We link these
the evolution of professional asset management in these environments
to the development of the respective capital markets and to the evolution of
corporate governance. We find that the fund management industry occupies a
very small niche in domestic financial systems that are dominated by
banks. At the same time, we find that
its growth has been very rapid in the early 2000s and we suggest that this is
likely to persist as the demand for professional management of financial
wealth in the region develops and as the pension fund sectors of the
respective economies are liberalized to allow larger portions of assets to be
invested in collective investment schemes. Keywords: Asset management, Asia
financial systems, pension funds, mutual funds, private banking. JEL Classification: G23,
O16. Paper can be downloaded
from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952568. INNOVATION IN INTERNATIONAL LAW AND GLOBAL FINANCE: ESTIMATING THE FINANCIAL IMPACT OF THE CAPE
TOWN CONVENTION Anthony Saunders, Anand
Srinivasan and Ingo Walter This paper examines the
financial impact of a transfer of legal sovereignty covering the rights to
collateral to an international regime in the case of the Cape Town Convention
and Protocol covering international mobile assets, specifically commercial
aircraft and related equipment, which came into force in 2004. We estimate
the impact on financing costs facing airlines based in signatory countries in
terms of access to financial markets and interest differentials, debt rating
migration and stock prices using rating-sensitivity analysis, OLS regressions
and event studies. We find that the present value of the resulting financing
cost reductions are very significant and are biased in favor of developing
countries, the sources of much of the
growth in demand for commercial aircraft going forward. The results suggest
the power of changes in the legal framework of financial markets to influence
the costs and pricing of global financial flows. Keywords: Law and finance;
secured lending; aircraft finance; leasing; sovereign risk; asset
securitization. JEL: K11, K33, F34, G15,
G28, G33. Paper can be downloaded
from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=894027 STRATEGIES
IN FINANCIAL SERVICES, THE
SHAREHOLDERS AND THE SYSTEM IS BIGGER AND BROADER BETTER? Ingo Walter The financial services
industry is “special” in a variety of ways, including the fiduciary nature of
the business, its role at the center of the payments and capital allocation
process with all its static and dynamic implications for economic
performance, and the systemic nature of problems that can arise in the
industry. So the structure, conduct and performance of the industry has unusually important public interest dimensions. One
facet of the discussion has focused on size of financial firms, however
measured, and the range of activities conducted by them. Is size positively
related to total returns to shareholders? If so, does this involve gains in
efficiency or transfers of wealth to shareholders from other constituencies,
or maybe both? Does greater breadth generate sufficient information-cost and
transaction-cost economies to be beneficial to shareholders and customers, or
can it work against their interests in ways that may ultimately impede
shareholder value as well? And is bigger and broader also safer? This paper
starts with a simple strategic framework for thinking about these issues from
the perspective of the management of financial firms. What should they be
trying to do, and how does this relate to the issues of size and breadth? It
then reviews the available evidence and reaches a set of tentative
conclusions from what we know so far, both from a shareholder perspective and
that of the financial system as a whole.
JEL Classification G20, L10 |
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ARE EMERGING MARKET EQUITIES A SEPARATE ASSET
CLASS? Anthony Saunders and Ingo
Walter Historically, fund managers and investors have
considered emerging market equities as a separate asset class in making their
portfolio allocation decisions. For example, an asset manager might be
instructed to divide an institutional investor’s portfolio into 20% emerging
market and 80% developed market securities. Within these broad divisions, the
asset manager would usually be given discretion to allocate his or her
portfolio among individual country and/or industry securities based on their
risk, return and correlation characteristics. In recent years a number of
economic, legal, accounting and financial developments have eroded the
sources of separation between what had been thought of as “emerging” and
“developed” country financial markets. These liberalizations include capital
market reforms that have reduced the constraints and limits on foreign
investors (such as those imposed on the proportion of shares a foreign
investor might hold in domestic firms’ equities), as well as the
establishment of country funds. Many of the initial liberalizations took
place in the mid to late 1980s and have continued into the 1990s, even as
emerging markets experienced considerable return volatility during this
period. Part of this return volatility has been attributed to internal
conditions (e.g., Mexico, Russia, Indonesia, etc.) while part has been
attributed to the greater openness of emerging market economies to external
shocks (so-called contagion-effects). Developed country markets have not been
immune from either increased volatility or contagion emanating from emerging
markets. For example, US and UK financial market
volatilities were significantly impacted by both the Asian and Russian crises
of 1997 and 1998. This paper examines quantitative and qualitative evidence
underlying the view that emerging market equities no longer represent a
separate asset class and, relatedly, that world
capital markets are becoming increasingly integrated. We find that empirical
evidence strongly supports the view that the world’s financial markets are
becoming increasingly integrated and that the integration process encompasses
emerging markets. As a result, the idea of rigidly separating emerging market
and developed market pools of investable funds
(along with adopting separate performance benchmarks) seems no longer
appropriate. THE ASSET MANAGEMENT INDUSTRY IN EUROPE: Ingo
Walter The asset management industry represents one
of the most dynamic parts of the global financial services sector. Funds
under institutional management are massive and growing rapidly, particularly
as part of the resolution of pension pressures in various parts of the world.
The industry is not, however, well understood from the perspective if
industrial organization and international competition, which is the focus of
this paper. It begins with a schematic of asset management in a national and
global flow-of-funds context, identifying the types of asset-management
functions that are performed and how they are linked into the financial
system. It then assesses in some detail the three principal sectors of the
asset management industry -- mutual funds, pension funds, and private-client
assets, as well as foundations, endowments, central bank reserves and other
large financial pools requiring institutional asset management services.
Relevant comparisons are drawn between the United States, Europe, Japan and
selected emerging-market countries. This is followed by a discussion of the
competitive structure, conduct and performance of the asset management
industry, and its impact on global capital markets. CONFLICTS OF INTEREST AND
MARKET DISCIPLINE IN FINANCIAL SERVICES FIRMS Ingo Walter There has been substantial
public and regulatory attention of late to apparent exploitation of conflicts
of interest involving financial services firms based on financial market imperfections
and asymmetric information. This paper proposes a workable taxonomy of
conflicts of interest in financial services firms, and links it to the nature
and scope of activities conducted by such firms, including possible
compounding of interest-conflicts in multifunctional client relationships. It
lays out the conditions that either encourage or constrain exploitation of
conflicts of interest, focusing in particular on the role of information
asymmetries and market discipline, including the shareholder-impact of
litigation and regulatory initiatives. External regulation and market
discipline are viewed as both complements and substitutes – market discipline
can leverage the impact of external regulatory sanctions, while improving its
granularity though detailed management initiatives applied under threat of
market discipline. At the same time, market discipline may help obviate the
need for some types of external control of conflict of interest exploitation
JEL G21, G24, G28, L14. Keywords: Conflicts of interest. Financial
regulation. Financial services. Banking. FINANCIAL INTEGRATION ACROSS
BORDERS AND SECTORS: IMPLICATIONS FOR REGULATORY STRUCTURES Ingo Walter This paper considers the generic processes and linkages that comprise
financial intermediation--the basic "financial hydraulics" that
ultimately drive efficiency and innovation in the financial system and its
impact on real-sector resource allocation and economic growth. It goes on to
document some of the structural changes that have occurred in both national
and global financial systems, and suggests how the microeconomics of
financial intermediation work. These can have an enormous impact on the
industrial structure of the financial services industry and on individual
firms. Sequentially, financial channels that exhibit greater static and
dynamic efficiency have supplanted less efficient ones. Competitive
distortions can retard this process, but they usually extract significant
economic costs and at the same time divert financial flows into other venues,
either domestically or elsewhere. We next examine the consequences of this
process in terms of financial sector reconfiguration, both within and between
the four major segments of the industry (commercial banking, securities and
investment banking, insurance, and asset management) as well as within and
between national financial systems. The paper then superimposes key
regulatory overlays onto the basic economics and facts of reconfiguration in
financial intermediation. This is a "special" industry, due both to
the imbedded systemic risks and its fiduciary nature. Balancing financial
efficiency against stability and fairness is not easy. The economics of
financial intermediation are highly regulation-sensitive, so small changes in
regulation can create important changes in markets. Regulators inevitably
make some mistakes, and regulatory mandates are unusually contentious and
vulnerable to entrenched economic interests. The final section of the paper considers
the linkages between structural change in financial intermediation and
supervisory and regulatory functions, including some comparisons between US
and European legacies and prospects. |