Banking Practices6th Annual Banking Research Conference

FDIC & JFSR

Discussion by

Mitchell A. PetersenKellogg School of Management &

National Bureau of Economic Research

Role of Banks Bank’s 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

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

On Loan Sales… Interpreting the

Findings Covenants More Binding On Sold Loans

Less Slack Increase Prob[Sale] 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

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%

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?

Capital Constraints…in Banking:

Holod & Peek

Firm’s 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)

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

Summary

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

Emerging Style of Research