Banking →
- 13 Aug 2012
- Research & Ideas
When Good Incentives Lead to Bad Decisions
New research by Associate Professor Shawn A. Cole, Martin Kanz, and Leora Klapper explores how various compensation incentives affect lending decisions among bank loan officers. They find that incentives have the power to change not only how we make decisions, but how we perceive reality. Closed for comment; 0 Comments.
- 13 Jun 2012
- HBS Case
HBS Cases: A Startup Takes On the Credit Ratings Giants
Moody's, Fitch, and Standard & Poor's dominated the credit ratings industry for decades. Could the recession weaken their hold? Professor Bo Becker discusses his case on super startup Kroll. Open for comment; 0 Comments.
- 24 Jan 2012
- Working Paper Summaries
What Do Development Banks Do? Evidence from Brazil, 2002-2009
Private firms in developed and developing markets find themselves competing with the so-called "national champions"—private and state-owned enterprises that receive entitlements, mostly trade protections and/or subsidized credit from the government. Most of these national champions get support by proposing long-term projects with large capital investment that would usually not be easy to fund using private capital. This paper, written by Research by Sergio G. Lazzarini, Aldo Musacchio, Rodrigo Bandeira-de-Mello, and Rosilene Marcon, uses evidence from Brazil to look at what happens to firm performance, investment, and financial expenditures when companies get subsidized credit from the Brazilian National Bank of Economic and Social Development, known as BNDES. Key concepts include: BNDES is one of the largest development banks in the world, but there was no previous comprehensive study tracking the effects of its loans and equity investments. This study finds that BNDES' loans and equity do not seem to affect firm-level operational performance and investment decisions, although the loans and equity do reduce firm-level cost of capital due to the governmental subsidies accompanying loans. Examining the selection process through which BNDES' capital is allocated to firms, the authors find that BNDES apparently selects firms with good operational performance but also provides more capital to firms with political connections (measured as campaign donations to politicians who won an election). Even so, there is no evidence that BNDES is systematically bailing out firms. In general, BNDES appears to be selecting firms with capacity to repay their loans, as regular commercial banks would do. Closed for comment; 0 Comments.
- 25 Oct 2011
- Research & Ideas
Chasing Stars: Why the Mighty Red Sox Struck Out
When the Red Sox announced they had signed away veteran pitcher John Lackey from the Anaheim Angels, it was the start of one of the most expensive talent hunts in baseball history. So why were the Red Sox an epic failure in 2011? Lackey's lackluster performance is a case study in the perils of chasing superstars, says Professor Boris Groysberg. Key concepts include: Firms and sports teams alike often make the mistake of believing that star quality is portable from one organization to the next. In addition to an employee's innate talent, star performance is often also dependent on factors such as organizational culture, networking opportunities, and the general team dynamic. After luring a star performer away from a competitor, it behooves an organization to invest some resources in integrating that person into the new environment. Open for comment; 0 Comments.
- 13 Jun 2011
- HBS Case
Mobile Banking for the Unbanked
A billion people in developing countries have no need for a savings account–but they do need a financial service that banks compete to provide. The new HBS case Mobile Banking for the Unbanked, written by professor Kash Rangan, is a lesson in understanding the real need of customers.
- 10 May 2011
- Working Paper Summaries
The Impact of Forward-Looking Metrics on Employee Decision Making
In marketing, the use of the customer lifetime value (CLV) metric encourages a focus on long-term customer relationships over short-term sales. This paper examines a situation in which a European bank introduced CLV data to its customer-facing employees, while still maintaining the incentives linked to short-term profitability; the goal was to discover whether and how these employees would modify their mortgage sales decisions. Research was conducted by Pablo Casas-Arce of Universitat Pompeu Fabra, and F. Asís Martínez-Jerez and V.G. Narayanan of Harvard Business School. Key concepts include: Having access to the CLV information caused bank managers to shift their focus toward more profitable client segments. However, the implementation of the CLV metric had no effect on how branch managers decided to price mortgages. Rather, they seemed to increase sales to their most valuable customers just by improving customer service. The availability of the CLV information also did not affect the bank managers' risk-taking tendencies—i.e., they did not relax their standards just to please their most valuable customers. The availability of CLV information led bank managers to cross-sell more products to their mortgage customers by targeting segments that bought a higher average number of products, but there was little effect on the average cross-selling to customers from any given segment. Closed for comment; 0 Comments.
- 09 May 2011
- Research & Ideas
Moving From Bean Counter to Game Changer
New research by HBS professor Anette Mikes and colleagues looks into how accountants, finance professionals, internal auditors, and risk managers gain influence in their organizations to become strategic decision makers. Key concepts include: Many organizations have functional experts who have deep knowledge but lack influence. They can influence high-level strategic thinking in their organizations by going through a process that transforms them from "box-checkers" to "frame-makers." Frame-makers understand how important it is to attach the tools they create to C-level business goals, such as linking them to the quarterly business review. Frame-makers stay relevant by becoming personally involved in the analysis and interpretation of the tools they create. Open for comment; 0 Comments.
- 03 May 2011
- Working Paper Summaries
How Do Risk Managers Become Influential? A Field Study of Toolmaking and Expertise in Two Financial Institutions
Most organizations have technical experts on staff—accountants, finance professionals, internal auditors, risk managers-but not all experts are listened to at higher levels. To understand how expert influence on strategic thinking can be increased, Matthew Hall, Anette Mikes, and Yuval Millo followed the organizational transformation of risk experts in two large UK banks. One transformation was successful, the other not. Are your experts merely "box-tickers," or are they influential "frame-makers"? Key concepts include: In the first bank, the transformation of the role of experts was a movement from tacit knowledge, communicable person-to-person, to tools-mediated, highly communicable knowledge that was evident from a variety of organizational documents, practices, and technologies, and embedded in the organization's decision-making processes. These transformed experts, called frame-makers, avoided detaching themselves completely from the resulting knowledge and maintained a high degree of personal involvement in producing analysis and interpretation while participating in executive decision-making. While toolmakers may be successful in becoming frame-makers they might also fall into one of three less influential roles: box-ticker, disconnected technician, or ad hoc advisor. The second bank saw a struggle between conflicting risk management worldviews, which ultimately divided the risk function, and prevented the risk managers from reaching the influential role of frame-makers. Closed for comment; 0 Comments.
- 25 Mar 2011
- Working Paper Summaries
How Do Incumbents Fare in the Face of Increased Service Competition?
Companies that compete by offering a high level of service are particularly vulnerable to lose customers—even longtime customers—when competitive entrants offer increased service levels, according to new research in the retail banking industry by Ryan W. Buell, Dennis Campbell, and Frances X. Frei, all of Harvard Business School. The good news for providers of high-touch service is that if they can sustain the service advantage over time, they could be rewarded with higher value customers. Key concepts include: Incumbents offering high quality service attract and retain customers who are disproportionately service sensitive and systematically vulnerable to competitors offering superior service. It is the high quality incumbent's most valuable customers—those with the longest tenure, most products, and highest balances—who are the most vulnerable to superior service alternatives. Conversely, when the incumbent fails to maintain a high service position within the market, its customers are vulnerable to competitors offering inferior service but lower prices. Firms that make the strategic decision not to compete on service may not need to be concerned about the entry or expansion of competitors offering superior service. A long-run implication is that incumbents that can sustain a high level of service relative to local competitors will be able to attract and retain higher value customers over time. Closed for comment; 0 Comments.
- 16 Mar 2011
- Working Paper Summaries
Driven by Social Comparisons: How Feedback about Coworkers’ Effort Influences Individual Productivity
Francesca Gino and Bradley R. Staats explore how the valence (positive versus negative), type (direct versus indirect), and timing (one-shot versus persistent) of performance feedback affects an employee's job productivity. Specifically, through field experiments at a Japanese bank, they investigate the extent to which job performance is affected when employees learn where they stand relative to their coworkers. Key concepts include: Telling an employee that her job performance falls in the bottom of her group will lead that employee to better her performance. But telling her that she is at the top of the group will not significantly affect performance. An indirect approach yields different results. An employee who simply learns that he doesn't fall in the bottom of his group is likely to worsen his productivity, while an employee who simply learns that he isn't in the top of his group is not likely to change his work habits at all. Persistence is effective. Employees who receive persistent feedback from employers are likely to perform better at work than those who don't, and that goes for both positive and negative feedback. Closed for comment; 0 Comments.
- 27 Jan 2011
- Working Paper Summaries
A Brief Postwar History of US Consumer Finance
The growth of the consumer finance sector after World War II provided a bevy of new financial options for Americans. These options led to a "do-it-yourself" approach to consumer finance, and an increase in household risk taking. In this paper, Harvard Business School professors Gunnar Trumbull and Peter Tufano, along with former HBS research associate Andrea Ryan, discuss the major themes that dominated the expansive postwar sector, including some of the factors that set the stage for the recent subprime mortgage crisis. Key concepts include: The authors identify four major consumer finance trends from the past 65 years: an increase in the number of available financial options including innovations; greater access to those options for more Americans; a trend toward a do-it-yourself approach in consumer financial services; and a resultant increase in household risk taking. The type of debt households carry has changed dramatically over the past several decades. The share of household financial liabilities represented by mortgages increased from 59 percent in 1950 to 73 percent in 2008, while the share represented by consumer debt fell from 31 percent to 18 percent. Closed for comment; 0 Comments.
- 01 Dec 2010
- Working Paper Summaries
Reversing the Null: Regulation, Deregulation, and the Power of Ideas
Who's to blame for the recent financial crisis? To some extent, the fault lies with scholars of economics, according to professor David Moss. In this paper, he argues that an academic focus on government failure in the second half of the 20th century led to the general idea that less was always more when it came to regulation--which, in part, contributed to the crisis. To that end, he calls for a fundamental shift in academic research on the government's role in the economy. Key concepts include: By shifting their focus from market failure to government failure, late-20th-century scholars of economics helped create the impression that government can't get anything right. This helped set the stage for a widespread deregulatory mindset. This mindset was important in helping to eliminate unnecessary regulation, but it also hampered the creation of vital new regulation--including regulation of the largest and most "systemically significant" financial institutions--that might have prevented the financial crisis in the first place. The existing null, that government is perfect, has prompted a great deal of work on government failure. Now, Moss suggests, it's time for scholars to try to gain a deeper understanding of when government succeeds and under what conditions. How can well-known sources of government failure, such as regulatory capture, be prevented or minimized? To get there, he says, scholars need to adopt a new null hypothesis--namely, that government always fails. As scholars go about trying to reject that null, they are likely to generate valuable new research on government and regulation, including what works, what doesn't, and why. Closed for comment; 0 Comments.
- 13 Oct 2010
- Working Paper Summaries
Employee Selection as a Control System
One of the most powerful tools that an organization has to achieve its goals is the ability to hire employees with complementary values and capabilities. Reviewing personnel and lending data from a financial services organization undergoing a major decentralization process, Dennis Campbell offers the first direct empirical evidence establishing a link between employee selection and better alignment with organizational performance goals. Key concepts include: Employee selection as an important, but understudied, element of organizational control systems. The research provides the first direct empirical evidence of a link between employee selection and better management control outcomes. Employees chosen by the organization to function well in a decentralized environment were more likely to use decision-making authority in the granting and structuring of consumer loans than those who were not, and made less risky choices. The results provide evidence of longstanding models of management control, which posit that control on organizations can be obtained by managing "inputs" (e.g. employee selection) rather than "outputs" (e.g., explicit incentive contracting on financial performance). Closed for comment; 0 Comments.
- 12 Oct 2010
- Working Paper Summaries
Crashes and Collateralized Lending
This paper presents a framework for understanding the contribution of systematic crash risk to the cost of capital for a variety of different types of securities. The framework isolates the systematic crash risk exposure of different collateral types (equities, corporate bonds, and CDO tranches), and provides a simple mechanism for allocating the cost of bearing this risk between a financing intermediary and investor. Research was conducted by Jakub W. Jurek (Bendheim Center for Finance, Princeton University) and Erik Stafford (Harvard Business School). Key concepts include: A typical loan extended by a broker to an investor for a purchase on margin is collateralized by the underlying security and protected by the investor's capital contribution (the collateral, margin, or "haircut"). The haircut protects the intermediary from changes in the liquidation value of the collateral. The researchers' focus is looking at haircuts as an effective protection against large market declines. They derive a schedule of haircuts and financing rates (spreads above the risk-free rate), which represents the intermediary's fair charge for providing leverage to the investor. The framework also can be used to stress test different types of collateral by examining the predicted financing terms as market conditions change. This systematic credit risk channel has not been explored in the banking literature, despite the growing role of collateralized borrowing in the economy (e.g. repo market) and the seeming relevance of ensuring collateral robustness in adverse economic states. Closed for comment; 0 Comments.
- 22 Sep 2010
- Working Paper Summaries
The Task and Temporal Microstructure of Productivity: Evidence from Japanese Financial Services
Boredom and fatigue often hamper the productivity of workers whose jobs consist of repeating the same tasks. This paper explores ways in which companies can combat this problem, introducing the idea of the "restart effect" - a deliberate disruption that kindles productivity. Research, which focused on a loan-application processing line at a Japanese bank, was conducted by HBS professor Francesca Gino and Kenan-Flagler Business School assistant professor Bradley R. Staats. Key concepts include: Even taking acclimation into account, a worker's productivity will improve immediately after switching from one task to another, so it behooves managers to introduce a variety of tasks into the workday. All else being equal, workers perform better during the first half of the day than the second half. Productivity improves markedly when workers are given the incentive of leaving as soon as the day's tasks are completed. (The researchers found that workers performed 13.1% better on Saturdays, when they had the option of leaving early, than on Mondays, when they were required to work a nine-hour day.) Closed for comment; 0 Comments.
- 21 Jul 2010
- Working Paper Summaries
Foreign Entry and the Mexican Banking System, 1997-2007
What are the effects of foreign bank entry in developing economies? In recent years, governments around the world have been opening up their banking systems to foreign competition. In Mexico, for example, the market share of foreign ownership of banks increased fivefold between 1997 and 2007. In this paper, Stanford professor Stephen Haber and HBS professor Aldo Musacchio describe their detailed study of the impact of foreign entry in Mexico during that period. Overall, results suggest that while foreign entry in Mexico is associated with greater stability of the banking system, it has not increased the availability of credit, and foreign entry is not a solution to a property rights environment that makes contract enforcement costly. Key concepts include: Foreign entry in Mexico is associated with greater banking system stability. Foreign entry, however, has not increased the availability of credit. Mexican banks that were sold to foreign multinationals were invested in housing loans with a high risk of default and a low rate of interest. Foreign purchasers appear to have shifted the loan portfolio away from these investments. However, foreign entry, whether by mergers and acquisitions or by greenfield banks, has not led to an increase in financial intermediation. At the end of 1997, GDP was 18 percent, and 12 years later it had grown to only 23 percent, low by any comparative standard. In Mexico, foreign entry is not a solution to a property rights environment that makes contract enforcement costly. Closed for comment; 0 Comments.
- 01 Jul 2010
- Working Paper Summaries
Cyclicality of Credit Supply: Firm Level Evidence
Bank lending falls in economic recessions. In particular, it shrank considerably during the recent economic downturn. Does such cyclicality of bank lending reflect a decline in banks' willingness to lend (the "loan supply" effect) or reduced demand for loans from firms (the "loan demand" effect)? The considerable attention that is given to banks' financial health by the Federal Reserve, Congress, and other branches of government is only warranted if the answer is supply. Focusing on U.S. firms that raised new debt financing between 1990 and 2009, HBS professors Bo Becker and Victoria Ivashina demonstrate that many large U.S. firms turn to the bond market when banks are in poor financial health. When times are better, the same firms get bank loans. Becker and Ivashina argue that the substitution between bonds and loans at the firm-level is a good economic proxy for the bank credit supply. Key concepts include: The incidence of bank loans, as compared to bonds, is very cyclical. Firms getting a bank loan are likely to stay with that form of debt in the near future. The pattern is similar in most years. But when banks are doing poorly, this pattern is reversed, and many large firms who would typically turn to banks for debt financing, instead issue bonds. The loan-and-bond mix for large firms is a strong predictor of a likelihood of firms without access to bond markets to raise bank debt. Closed for comment; 0 Comments.
- 24 Jun 2010
- Working Paper Summaries
“An Unfair Advantage”? Combining Banking with Private Equity Investing
Does the combination of banking and private equity investing endow banks with superior information that allows them to identify good prospects and garner superior returns? Or does the combination bestow banks with an unfair ability to expand their balance sheets, capturing benefits within the bank at the expense of the overall market and ultimately the taxpayers? INSEAD's Lily Fang and Harvard Business School professors Victoria Ivashina and Josh Lerner examined nearly 8,000 unique private equity transactions between 1978 and 2009, looking in depth at the nature of the private equity investors, the structure of the investments, and the performance of the firms. Collectively, findings suggest that there are risks in combining banking and private equity investing. The results are consistent with many of the worries about these transactions articulated by policymakers. Key concepts include: The cyclicality of bank-affiliated transactions, the time-varying pattern of the financing benefit enjoyed by affiliated deals, and the generally worse outcomes of these deals done at market peaks raise questions about the desirability of combining banking with private equity investing. These investments seem to exacerbate the amplitude of waves in the private equity market, leading to more transactions at precisely the times when the private and social returns are likely to be the lowest. Investments involving both affiliated and nonaffiliated firms appear particularly vulnerable to downturns. Some information-related synergies, however, are captured internally by the banks. But banks' involvement poses significant issues as well. The share of banks in the private equity market is substantial. Between 1983 and 2009, over one-quarter of all private equity investments involved bank-affiliated private equity groups. Closed for comment; 0 Comments.
- 17 May 2010
- Research & Ideas
What Brazil Teaches About Investor Protection
When Brazil entered the 20th century, its companies were a model of transparency and offered investor protections that government did not. Can our financial regulators learn a lesson from history? HBS professor Aldo Musacchio shares insights from his new book. Key concepts include: Companies can overcome the shortcomings of the legal system in which they operate by offering protections to investors. Corporate disclosure is perhaps the most important necessity for investor confidence. Policymakers should seek a balance between regulation, financial development, and economic growth. Closed for comment; 0 Comments.
The Immigrants Who Built America’s Financial System
In The Founders and Finance, Harvard Business School business historian Thomas McCraw lays out in fascinating detail how immigrants Alexander Hamilton and Albert Gallatin became essential to the nation's survival. Open for comment; 0 Comments.