Banking Practices 6 th Annual Banking Research Conference

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

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

On Loan Sales… Interpreting the Findings n Covenants More Binding On Sold Loans n n n Less Slack Increase Prob[Sale] Net Worth: Current Level or Covenant Information Asymmetry vs. Governance n n Loan Ratings Increase Loan Sales (Sufi, ’ 06) Ratings Matter & Magnitude is Large (Table 4) n n n Rating 0. 67 # of Covenants or Net Worth Slack 0. 24 - 0. 28 Governance Rules of Non-Bank Buyers

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

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

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

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

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