Monday, November 01, 2004

Commercial banking and Investment banking-Yasuda

In a forthcoming Journal of Finance article, Yasuda adds significantly to our understanding of the relationships between corporate borrower, commercial bankers, and investment bankers.

It is rare that an abstract summarizes a paper's findings as well as this one, so I will let the abstract give his findings:
"[Commercial] bank relationships have positive and significant effects on a firm’s underwriter choice, over and above their effects on fees. This result is sharply stronger for junk-bond issuers and first-time issuers. I also find that there is a significant fee discount when there are relationships between firms and commercial banks. Finally, I find that serving as arranger of past loan transactions has the strongest effect on underwriter choice, whereas serving merely as participant has no effect."
While the findings are in the abstract, the implications and interpretations are really what matters and for these, you have to read the paper.

Noteworthy points:
  1. Commercial banks made quick progress in gaining market share from investment bankers: "Between 1993 and 1996, the top ten investment banks’ collective
    market share was 11 percentage points less than it had been between 1985 and 1988
    (from 87% to 76%) while the top five commercial banks collectively accounted for 13% of
    corporate-bond underwriting." This success stems from both lowering fees and relationships with the borrowing firms.
  2. The data includes over 1,500 firms from 1993-1997 and also has their bank relationships.
  3. Not surprisingly, existing bank relationships are most important where information asymmetries are most important: low rated firms.
  4. Fees are lower when there is already an existing relationship in place: "there is a significant fee discount when there are relationships between the firms and commercial banks."
  5. <>Just because a bank is in the syndicate for one loan does not necessarily increase odds of being selected to underwrite another loan in the future. However, the closer the relationship between firm and bank, the more likely the bank will be selected in the future to underwrite a loan. In other words, there are relationships and then there are relationships.
    "This finding supports the view that only top-tier members of syndicates are engaged in information production about the borrower firms, while lower-tier members are merely invited by arranger banks forrisk-sharing purposes and do not gain any informational advantage about the firms."

Point #4 deserves further mention as previous studies have found that commercial banks could get a better price for issuing debt from firms with whom there was an existing relationship. As Yasuda points out it could be hypothesized that the bank would try to capture this better price through higher fees. This does not appear to be the case, which suggests that "commercial banks are not at an absolute competitive advantage over investments banks."

So why the lower fees? Probably because the information costs are lower at firms where there is an existing relationship. And this cost savings is being passed on to the issuing firm.

A great read!

Yasuda's paper is forthcoming in the Journal of Finance.

An earlier version is available on SSRN.

As an unpaid endorsement, I want to say that The Journal of Finance is probably my favorite Journal. Sure there are others that are close (obviously JFE), but the ability to constantly find really insightful papers sets the Journal of Finance above the rest. It should come with a warning however: Reading many interesting Finance papers available, is habit forming and may be the cause of a very messy desk! lol...

1 comment: said...

Debt Management, Consolidation Loans & Elimination Programs

It's time to do something about your debt. Millions of Americans have a wallet full of credit cards--plus expensive personal loans, auto loans, second mortgages and more. you're tired of paying 10%, 15%, 19% and more on your credit cards, auto loans, personal loans and other types of credit, today is the day to wipe the slate clean and start over. A debt consolidation loan can lower your interest rate, combine all your accounts into just one convenient monthly payment and give you some extra breathing room in your budget. You'll save money now - and at tax time too (be sure to consult your tax advisor for details.)

With mortgage interest rates the lowest they've been in decades, now is the perfect time to refinance your home and pay off all those nagging bills. You can count on America's Lending Partners FREE service to help you lower your interest rate, pay off those nagging bills and cut your monthly payments by as much as $300, $450, even $500 or more.

Start your request at left. Then, we'll match your profile with our nationwide network of lenders. You'll get up to 4 great offers from some of the most prominent and respected refinance debt consolidation lenders in America...each presenting their absolute best loan offer to win your business

Do not wait any longer; now is the time to take charge of your debt situation. Feel free to brows our site for more information, or for a free, no obligation debt quote, fill out a quick response form on your left, or click here for a free debt quote.

If your in debt... you're not alone. Today, millions of Americans are having difficulty paying their debts. Most of those in financial distress are middle income families with jobs who want to pay off what they owe.

Now is the time to act! Doing nothing can lead to much larger problems.


Free Loan Request - Get Up To 4 Loan Offers!

**** You must own a home to qualify for this service. ****