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Financial Institutions

COMMENTARY 

Enhanced Supervision: A New Regime for Regulating Large, Complex Financial Institutions
by CFP Academic Fellow Phillip Swagel
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Swagel testifies before the Committee on Banking, Housing, and Urban Affairs, Subcommittee on Financial Institutions and Consumer Protection in the U.S. Senate on December 7, 2011.

Monetary Policy and Job Creation
by Federal Reserve Governor Sarah Bloom Raskin
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Governor Raskin defends the recent Fed policy moves at CFP’s Distinguished Speaker Series on September 26, 2011.

WORKING AND WHITE PAPERS 

Monitoring Daily Hedge Fund Performance When Only Monthly Data is Available
By Russ Wermers, Daniel Li, Michael Markov
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Abstract: This paper introduces a new approach to monitoring the daily risk of investing in hedge funds. Specifically, we use low-frequency (monthly) models to forecast high-frequency (daily) hedge fund returns. This approach addresses the common problem that confronts investors who wish to monitor their hedge funds on a daily basis—disclosure of returns by funds occurs only at a monthly frequency, usually with a time lag. We use monthly returns on investable assets or factors to fit monthly hedge fund returns, then forecast daily returns of hedge funds during the following month using the publicly observed daily returns on the explanatory assets. We show that our replication approach can be used to forecast daily returns of long/short hedge funds. In addition, for diversified portfolios such as hedge fund indices and funds-of-hedge-funds, it forecasts daily returns very accurately. We illustrate how our simple replication approach can be used to (1) hedge daily hedge fund risk and (2) estimate and control value-at-risk. 

Mutual Fund Performance and Governance Structure: The Role of Portfolio Managers and Boards of Directors
by Bill Ding & Russ Wermers
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Abstract: This paper conducts a comprehensive analysis of the relation between the performance and governance structure of open-end, domestic-equity mutual funds during the 1985 to 2002 period. We show that experienced large-fund portfolio managers outperform their size, book-to-market, and momentum benchmarks, but that experienced small-fund portfolio managers underperform their benchmarks—indicating the presence of managerial entrenchment in the mutual fund industry. When we examine the role of fund boards, we find that independent directors are crucial for terminating underperforming seasoned portfolio managers, as outflows are not sufficient to pressure the management company to do so. In fact, our evidence indicates that independent boards impact pre-expense performance much more significantly than their prior-documented impact on fund fees. We also find a role for internal governance: inside directors and large management company complexes appear to better monitor performance due to “hidden actions,” as well as terminating underperforming inexperienced managers.

The Cost Effectiveness of the Private-Sector Reorganization of Failed Banks
by Rosalind L. Bennett and Haluk Ünal
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Abstract: In this paper, we examine how the cost to the FDIC of resolving bank failures differs between two types of resolution methods of failed banks: liquidation and a private-sector reorganization. An FDIC liquidation is analogous to a Chapter 7 bankruptcy and a private-sector reorganization is analogous to a Chapter 11 bankruptcy. Our findings show that private-sector reorganizations do not deliver the expected cost-savings prior to the passage of FDICIA in 1991, a period of industry distress. We obtain this result when we control for the selection bias that arises from the resolution process. In contrast, during the post-FDICIA period, we observe that private-sector reorganizations yield significant cost savings over FDIC liquidations. We also find that the direct costs are lower for private-sector reorganizations over the sample period. When compared to nonfinancial bankruptcy costs, FDIC resolution methods appear to be less costly than Chapter 7 and Chapter 11 bankruptcies. 

Designing Countercyclical and Risk Based Aggregate Deposit Insurance Premia
by Dilip B. Madan, Haluk Unal and Robert A. Jarrow
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Abstract: This paper proposes an aggregate deposit insurance premium design that is risk-based in the sense that the premium structure ensures the deposit insurance system has a target of survival over the longer term. Such a premium system naturally exceeds the actuarily fair value and leads to a growth in the insurance fund over time. The proposed system builds in a swap in premia that reduces premia when fund size exceeds a threshold. In addition, we build in a swap contract that trades premia in good times for relief in bad times.