Journal of Financial Regulation and Compliance

Specialization versus diversification in venture capital investing : Table of Contents

James R. Bartkus, M. Kabir Hassan — Sun May 03 14:15:07 BST 2009

Abstract:
Purpose – Modern portfolio theory demonstrates that a well-diversified portfolio will minimize unsystematic risk. It may be impractical to achieve a well-diversified portfolio of venture capital (VC) investments due to market imperfections, leading to the decision to specialize. The purpose of this paper is to determine the implications of choosing a strategy of specialization versus diversification in venture investing. Design/methodology/approach – Using a dataset of US VC funds across a 20-year time period, this paper verifies that there has been a tendency for venture capitalists to pursue a specialization strategy in both industry and stage of development of portfolio firms. A multivariate two-limit tobit model is constructed to determine the effects of these decisions on venture success rates. Findings – It is found that venture capitalists that diversify across portfolio company stage of development have greater success in bringing companies public and exiting their investments via acquisition. Industry specialization has no significant impact on venture fund success rates. Research limitations/implications – Success rates may be less important than returns to investors in VC. Future research should examine the effects of specialization on investor returns. Practical implications – It may be beneficial to increase the level of diversification of VC investments across portfolio company stage of development. The lack of diversification across industry has not significantly affected success rates across funds, thus the tendency to specialize in particular industries over the sample period is not necessarily a poor decision. Originality/value – Prior research demonstrates a tendency for specialization in VC investing. This paper examines the implications of adopting this strategy.

A note on ratings of international banks : Table of Contents

Roman Matousek, Chris Stewart — Sun May 03 14:15:07 BST 2009

Abstract:
Purpose – The purpose of this paper is to analyse the quantitative determinants of individual ratings of commercial banks (as conducted by Fitch Ratings). Design/methodology/approach – The ordered probit model is applied as an extension of the standard binary probit model. The model is estimated using a sample of 681 international banks. Findings – Banks with a greater capitalisation, larger assets, and a higher return on assets have higher bank ratings. Further, the greater is a bank's liquidity, the larger is its net interest margin and the more is the ratio of its operating expenses to total operating income the lower is a bank's rating. Originality/value – Modelling the determinants of international bank ratings spanning a sample of 90 countries. Applying a model with dynamics that considers whether the rating is determined by information up to four years prior to the rating date.

Competition issues in European banking : Table of Contents

Barbara Casu, Claudia Girardone — Sun May 03 14:15:07 BST 2009

Abstract:
Purpose – The purpose of this paper is to assess the outcome of European Union (EU) deregulation and competition policies on the competitive conditions of the main EU banking markets. Design/methodology/approach – After a review of deregulation and competitition policies in the EU banking industry, the degree of competition in the largest five EU banking markets using is tessted both structural (concentration ratios and Herfindahl-Hirshman indices) and non-structural (H-statistics and Lerner index) approaches. Findings – Results indicate that EU banking markets are becoming progressively more concentrated and that there is no evidence of an increase in competitive pressure. Country differences are also apparent thereby indicating that despite the sustained regulatory interventions, significant barriers to the integration of EU retail banking markets remain. In line with recent literature, the analysis also seems to provide further evidence that concentration is not necessarily a good proxy for competition. Originality/value – Increased market concentration and its effects on competition are of relevance in a period of renewed EU regulatory efforts to remove the remaining barriers to the integration of financial markets. The evaluation of competitive conditions and market power in EU banking are therefore of interest to policy-makers and regulators.

Measuring and regulating extreme risk : Table of Contents

Ulf Nielsson — Sun May 03 14:15:07 BST 2009

Abstract:
Purpose – The purpose of this paper is to discuss two important extensions to the well-known value-at-risk (VaR) methodology, namely extreme value theory (EVT) and expected shortfall (ES). Both of these extensions address the weaknesses of VaR, in particular the methodology's tendency to systematically underestimate risk of extreme market events. Design/methodology/approach – The theory of VaR and the two extensions are reviewed and the methodology is evaluated in light of the Basel II regulatory framework that calls for the use of VaR by financial institutions. Findings – The paper clarifies the use of VaR and its extensions to make practitioners more aware of the pitfalls and how to address them. It is recommended that the two extended measures of extreme event risk (i.e. EVT and ES) be included into every risk manager's information pool. Originality/value – A compact review of these approaches and their regulatory connection has not previously been compiled. This review is of particular value to risk managers and policy markers given the turbulent market conditions of the past year.

How small are the banking sectors in central and Eastern European countries really? : Table of Contents

Valeriya Dinger, Jürgen von Hagen — Sun May 03 14:15:07 BST 2009

Abstract:
Purpose – The purpose of this paper is to present an analysis of the size of the banking sectors in central and Eastern European (CEE) countries. The banking sectors' ability is focused to provide financial intermediation between savers and investors in the economy. Design/methodology/approach – The existing literature on banking in transition economies argues in unison that banking sectors in CEE countries are too small and do not provide sufficient levels of financial intermediation. In this paper, a common drawback of the existing measures used to indicate the size of CEE banking sectors is detected: they all relate the volume of bank intermediation to gross domestic product (GDP). It is argued that since transition economies have a low stock of financial wealth relative to economic activity, a more objective measure of the size of the banking sector is the ratio of bank assets to a proxy of the stock of financial wealth rather than to GDP. Findings – There is evidence that the estimation of the size of the banking sectors relative to GDP produce downward biased measures for the ability of CEE banks to intermediate available financial resources. When the size of the banking sector is measured relative to financial wealth, the gap between the developed European Union banking systems and those of the CEE countries is not as severe as argued in studies based on the traditional approach of measuring the size of the banking system with respect to GDP. Practical implications – Using the downward biased measure of financial system development to stress the underdevelopment of the financial intermediation in CEE may produce misleading policy recommendations, e.g. recommendations in the direction of rapid financial system expansion by lowering barriers of entry for new banks. The authors' new measure presents an alternative that should be considered by policy makers in the design of measures promoting financial system development. Originality/value – The paper challenges the existing consensus on severe underdevelopment of the CEE banking sectors. It presents a new approach of accessing financial system development in emerging economies.

High Court ruling on recoverability of claimants' losses arising from unauthorised insurance activity : Table of Contents

Joanna Gray — Sun May 03 14:15:07 BST 2009

Abstract:
Purpose – The purpose of this paper is to report and comment on the High Court ruling on recoverability of claimants' losses arising from unauthorised insurance activity. Design/methodology/approach – The paper outlines the facts surrounding the case and comments on the decision. Findings – The court pointed out that the issues that fell to be determined were all law and principle and not of fact. Originality/value – The paper highlights how this was the first occasion that the courts had had cause to consider the effect of some key provisions of Financial Services and Markets Act 2000 that relate to the enforceability and redress position in the context of unauthorised insurance business.

Financial supervision in the EU: is there convergence in the national architectures? : Table of Contents

Donato Masciandaro, Maria Nieto, Marc Quintyn — Sun May 03 14:15:07 BST 2009

Abstract:
Purpose – The purpose of this paper is to review current trends in reforms of the supervisory architecture in European Union (EU) countries. Design/methodology/approach – Against the background of the debate on the advisability of further centralizing prudential supervision in the EU this paper develops a study of applied institutional economics, analyzing the financial supervisory architecture of each of the 27 EU countries and assesses their degree of institutional convergence. The paper investigate whether the recent wave of reforms are leading to a convergence of the national architectures. Findings – While the degree of supervisory convergence is low, there is no single superior model of bank supervision. Originality/value – The paper contributes to the debate on convergence of supervisory architectures in EU member countries.