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Estimation of the current market value of banks and the pricing of risk-adjusted deposit insurance and… Lau, Yam Shing 1987

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ESTIMATION OF  OF THE CURRENT  RISK-ADJUSTED  DEPOSIT  OPTION-PRICING  MARKET  VALUE  INSURANCE  O F BANKS A N D T H E  AND  LOAN  GUARANTEE  C O N T E X T : T H E CASE O F H O N G  KONG  by L A U , Y A M SHING A THESIS SUBMITTED IN PARTIAL FULFILMENT O F THE REQUIREMENTS FOR THE DECREE O F MASTER O F SCIENCE (BUSINESS ADMINISTRATION)  in THE FACULTY O F GRADUATE STUDIES F a c u l t y o f Commerce and Business Administration We  accept this thesis as conforming to  the required  standard  THE UNIVERSITY O F BRITISH C O L U M B I A 13 April 1987 © L A U , Yam Shing, 1987  PRICING IN  AN  In presenting this thesis in partial fulfilment of the requirements for an advanced degree at The University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission.  Department of Commerce The University of British Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 Date: 13 April  1987  ABSTRACT This paper presents a methodology empirically banks  estimating  and deposit  the  prices  insurance  The approach used exploits and  common  available more useful  stock  information,  specifically in  expanded  the to  in  put  government  solvency  guarantees failure  of banks and for  on  loans  history  study  evaluating  those  Though is  the  limited  successful solvency  aspect.  information  of  available  ii  the  in identifying  Moreover,  this study can be improved.  by  data  made  by  of Hong Kong.  the isomorphic correspondence between loan  early-warning include  of  premiums, from the  options.  this  for evaluating the  set  guarantees of  publicly  problem banks,  banks.  Therefore,  if  the  information  to  the  regulator,  the set the  and  model  is  can  be  result  of  TABLE  OF  CONTENTS  Abstract  ii  Acknowledgement  vi  Dedication  vii  I. I N T R O D U C T I O N  1  II. P R E V I O U S R E S E A R C H  5  III. B A C K G R O U N D IV.  V.  VI.  VII.  DEPOSIT I N S U R A N C E  9 AND GOVERNMENT  GUARANTEE  16  1. Effectiveness in Protecting Depositors 2. Transactions Costs in Case of Bank Failure 3. Subsidies to Shareholders and Economic Efficiency  19 19 20  S T R U C T U R E O F T Y P I C A L B A N K B A L A N C E S H E E T IN H . K 1. Classification of Assets 2. Classification of Liabilities  23 23 25  T H E MODEL 1. The Current Asset Value of Banks and Their Variance 2. Price of the Government Guarantee on Advances 3. Deposit Insurance Premium  27 27 31 33  DATA  35  VIII. E M P I R I C A L  : FINDINGS A N D R E S U L T S  36  Concluding Remarks  64  Appendix. Weekly Closing Stock Prices  68  iii  LIST OF TABLES Table I. Abbreviations for the names of the sample banks  43  Table II. Annual deposit premiums for the year  43  1980  Table III. Annual deposit premiums for the year  1981  ..44  Table IV. Annual deposit premiums for the year  1982  44  Table V . Annual deposit premiums for the year Table VI. Annual deposit premiums for the year  1983 1984  Table VII. Annual deposit premiums for the year Table VIII. Market values Table  IX. Average 1981-84  and book values  annual  premiums  45 45  1985  46  of individual banks  and  prices  of  guarantees  47 for  the  period 48  Table X . Average Sv for the period 1981-84  49  Table XI. Debt-to-asset value ratio  49  Table XII. Deposits of individual banks  50  iv  List of Figures Fig. I. Average market values  of the failed and non-failed groups  Fig. III. Annual average  premiums for the failed and the non-failed groups.  Fig. IV. Annual average  Sv for the failed and non-failed groups  51 ... 53 54  Fig. V . Average debt-to-asset value ratio for the failed and non-failed groups. . 55 Fig. VI. Market value, book value, total debt and deposits of B E A  56  Fig. VII. Market value, book value, total debt and deposits of H K B  57  Fig. VIII. Market value, book value, total debt and deposits of H S B  58  Fig. IX. Market value, book value, total debt and deposits of W L B  59  Fig. X . Market value, book value, total debt and deposits of H K I C  60  Fig. XI. Market value, book value, total debt and deposits of K W B  61  Fig. XII. Market value, book value, total debt and deposits of O T B  62  Fig. XIII. Market value, book value, total debt and deposits of U B  63  v  ACKNOWLEDGEMENT I  would like to thank  Prof. E d Nosal, A  special  thanks  my  advisers  and Prof. Josef Zechner - who  who  indebted  to  Prof. Eduardo Schwartz.  advance  corporate F i n a n c e course,  for E.I.  the  gave  me  invaluable  advice  David Nickerson,  Chairman  constant intellectual  of my  support.  I  stages. Thesis  am  inspiration from  also the  this paper would not exist.  I have to acknowledge my  inclusion of their ideas in my  Ronn, M . Scholes,  and  Without his  Prof.  provided input at various  goes to Prof. Ronald Giammarino, the  Committee,  Furthermore,  - Prof. Maurice Levi,  indebtedness to  the  following  individuals  paper: F . Black, E . J . Kane, R . C . Merton,  C.W. Smith and, W . F . Sharpe.  vi  DEDICATION my  teachers, friends  vii  and  my  family.  I. INTRODUCTION In  this  the  study,  use  I evaluate  of  stock  the  market  solvency  and  of various banks in Hong Kong through  financial  data  for  the  period  1980-85.  The  evaluation employs a methodology for arriving at empirical estimates of prices for government  loan  isomorphic course  guarantees  correspondence  of  estimated  and  between  the  evaluations,  by  exploiting  the  the  of a  deposit  loan  guarantee  market value  isomorphic  insurance  of  and  relationship  traded  hence,  secondary  market  and,  their  by  using  put  option.  In  the  bank's  assets  is  also  a  call  between  is crucial because  any  a  individual  option. The estimation of market values in  premiums,  equity  and  bank's assets are not  market  values  cannot  be  readily observed for regulatory purposes.  The  bank  failure  Kong, the  history  Kong  is  of  third largest financial centre in the  structure completely and  of Hong  deposit  different  insurance  are  from  other  absent,  particular interest  Hong  world, has a financial system  major financial centres.  and  because  minimal  supervision  and  A central bank and  control  is  exercised over the banking industry.  This up  relative their  licensed  freedom has  South banks  East  induced a large  Asian  operating  in  headquarters Hong  Kong,  Hong Kong, are listed on the local stock  During the and  also  period from May 1985  some  other  non-listed  number of international banks to in  Hong  but  only  eight  There of  them,  are all  over 1 4 3 based  in  exchange.  to June  banks  Kong.  set  1986,  failed.  1  four of the eight listed banks  These  failure  cases  have  alarmed  INTRODUCTION / 2 the  general  system.  public  by  illustrating  shortcomings  In order to prevent bank runs  Hong Kong government of  the  the  distressed  provide  new  has  the  existing  a  financial  and panic during  regulatory crisis,  intervened in each of these case. As a result,  banks were  capital.  of  acquired by some other  Such  acquisitions  took  financial institutions  place  smoothly  most which  because  government offered a "free of charge" guarantee on loans made by the  the  the  distressed  banks which in turn ensured the post-acquisition value of the banks. (Throughout this paper, the meaning of "loans" is identical to the meaning of "advances" and the  two  the  government.  In  the  are used interchangably.) In some cases, the banks were  course  standards  to  prevent  government, because  I  institution's  of  reflected assets, market  that  the  Rather  new  than  values.  In  actual  the  market  i.e.,  the  historical costs,  be insolvent  as  With  value  and  legal  set of  up new the  are  on  efforts  of  the  can only be  and supervisory  assets. taken  tests  market  by  empirical evidence  by  the  inappropriate are  value  effective  and  banking  The book  not  of  an  liquidity  as  approximations  misfocused,  (see  problems  values  section  of to  VIII),  are those  "true"  an institution  de facto for a long time without ever becoming legally  revealed  made  worth calculated principally in  insolvency  bank's  and new  insolvency  turns on an institution's of net  rules  economically  concepts  focusing  cases,  of the  spite  standards  monitor accounting concepts  book  values.  government  systems  net assets, legal insolvency  in  Moreover,  the  bank failure. In  information  consistent.  authorities  terms  future  argue  regulator's  economically  and  of regulatory reform,  taken over by  may  insolvent.  the  difference  INTRODUCTION  / 3  between market value and book value (as measured in relative term) of a bank's assets is not stable over time. In other words, book value is not a useful signal of  the  market  value  of  an  institution's  assets.  Therefore, methods  insolvency based on book value does not give meaningful  On  the  other  managerial  and  sound  existing  Since  regulatory  there  risk-assessing  managers  adverse  system,  the  incentives.  theoretically incentives,  hand,  may  selection  institutions'  take  may  is  system  no  to  excessive risk arise.  give  distorted.  rise  pricing  eliminate  Alternatively  behaviour may be  may  and the  assessing  results.  appropriate  measure  of  to  adverse  system  adverse  and  managerial  problems of moral hazard  speaking, Some  under  the  suggestions on  existing  this  issue  are briefly outlined in section IV.  The  purposes  estimating the  "fair"  standards,  the  of  this  study  market value  market such  value  as  are  three-fold.  of the  bank's  assets.  The rationale is  that  only if  bank's  assets  can  will  various  of  capital  the  adequacy,  First,  show  I  employ  be  meaningful  a  technique  found  results  for  for  monitoring  purposes. This is a nontrivial problem because of the large number of non-traded assets on use to  which market  value  is  not  available.  annual data to estimate the market value, use  values relative under  confidential of the  banks  suitability the  monthly  special  of  data  supplied by  for regulatory deposit  economic  purposes.  insurance and  and  political  Moreover, if I  can  successfully  then it is viable for the all banks  to  Second,  attempt  loan  I  guarantees  environment  of  estimate to  regulator  the  examine  provided to  Hong  market  Kong.  the  banks,  Third,  a  model for calculating the risk-adjusted deposit insurance premium and risk-adjusted  INTRODUCTION / 4 price of the loan guarantee will be set up to estimate  the "fair" prices for these  guarantees.  In  the  next  background are  section, of the  outlined.  government structure  A  a  banking system comparison  loan  of  previous work in this  guarantee typical  model for estimating the calculate  the  in Hong  between  system  bank's  the  and  a  brief  of the  and the  deposit  recent  insurance  made  in  section  IV.  In  balance  sheet  in  Hong  Kong  is  price  of  the  data  set  for  government  are developed the  empirical  guarantee in section studies.  failure  system  current asset value of banks, and the  risk-adjusted  outline  Kong  In section III,  is  risk-adjusted deposit insurance premium is  area is discussed.  section  on  cases  and  the  V,  the  presented. models  the  The  used  loans  to and  VI. Section VII  Empirical  results are presented in section VIII, followed by concluding remarks.  findings  II. P R E V I O U S Merton [1977] is one of the pioneers pricing  of  deposit  relationship insurance of  insurance.  between  changes  His  deposit  the  in applying the option pricing model to  model  insurance  nature  RESEARCH  has  and  its  foundation  common  of risky debt  into  stock  "fair" deposit The  model  insurance  is  exacts the  designed  limited-liability  put  and  value  to  arrive  at  to  conclude  of the  a  point  the  put  a riskless  this insurance is the value of a put option on the  on  the  isomorphic  options.  obligation.  the  Deposit  The value  assets of the bank. Thus,  put via the  insurance premium.  estimate  the  appropriate  of  deposit  value  premium  of  this  from  the  value of the put.  Further,  Merton's  explicitly random  takes  model  into  [1978]  account  auditing times.  for  evaluating  surveillance  The method  used  exploits the isomorphic correspondence put  options.  By  assuming  spread between the  a  or to  auditing derive  market,  rate  the  conclusion  premium is, borne  by  conclusion  in effect,  the is  that  equity that  the  auditing  borne by the holders  rational  of  cost  only  Marcus  5  finds  rate  and  insurance  provides  for  formula again  and common stock  that  the  equilibrium  of return on deposits is  of  and the  A  pay  incurred in the course of protecting their own  Following Merton's approach [1977],  costs  component  bank.  deposit  per unit of time. He then comes  depositors,  the  investors  of  this valuation  he  and total  equal to the expected auditing costs per deposit to  cost  between loan guarantees  frictionless  market interest  the  more for  the  deposit  insurance  put option component intuitive  the  costs  reason which  for are  is  this solely  benefits.  and Shaked  [1984] (henceforth  MS)  PREVIOUS  RESEARCH / 6  calculate bank-specific estimates of the proper premium for deposit insurance from a  sample  evidence find  that  of  40  observations  in  the  United  States.  They  of substantial overpricing on the part of the FDIC. the  estimates  of  the  present  In other words, M S  appropriate risk-adjusted insurance  premiums  lower than the premiums that banks are currently paying to FDIC. the  question  process,  of  whether  overlook  the  or  not  effect  of  the  existing  various  Purchase and Assumption, to distressed these  assistance  measures  would  aids,  understate  lead to the conclusion of F D I C  MS  that  value  the  of assets.  such  the  the  pre-insurance and the  an  equation, they  connection,  they  post-insurance  as  cost  of  M S focus on  fair,  Direct  are  but,  in  the  Assistance  and  The exclusion of  deposit  insurance,  and  premium overpricing.  underlying security for the  In this  premium is  banks offered by FDIC.  consequently  assume  flat  empirical  have  put option is  the  pre-insurance  to make up an equation relating  value of the  assets. In postulating  argue that insurance is a one-period renegotiable  such  contract and  that all of the increment on account of the purchase of insurance accrues to the value  of  interest  the rates  bank. are  But  lower  insurance simply because  if  deposits  than  what  deposits  are they  covered should  be  by in  deposit the  absence  increases.  industry.  Moreover, the  of  bank deposit  are risk-free. In other words, the costs of fund  are lower. Holding the risk factor of the bank's assets constant, bank  insurance,  presence  of insurance  increases  the value of the competition in the  Competition may result in transfer of some or all of the  value from the bank to its customers.  increases  in  Hence there may be a reduction in value  due to competition. M S overlook these issues in their .argument.  PREVIOUS R E S E A R C H / 7 Also,  in arriving at  the  market value of the debt  to  be  therefore, This  riskless.  partly  assets, M S assume  debt is equal to its face value. The  overstated,  may  pre-insurance value of the  pre-  and so account  and  the for  In other words, they  post-insurance  value their  of the low  that  values  of  the  the treat  assets  are,  limited-liability put is understated.  estimates  of  the  deposit  insurance  premium.  Another  attempt,  following a similar line of argument, has  and Verma [1986] (henceforth overcome  the  risk-adjusted yields  premiums  a rank  agencies. for  shortfalls  Alternatively, the a  that  cross-sectional  M S . They  with  the  the  demonstrate  market  premium  option-based  comparisons  of  data  banks on  model may  given  made  by  Ronn  RV). They too, follow Merton's approach, but they  ordering of the  apportioning  emphasize  of  been  risk  the be  on  the  of  estimating  equity  value.  Their  approach  as  lends  banks,  to  yielding an  banking  approach across  feasibility  basis of their risk  viewed  across  the  sector.  itself  because  allocation rule In  more  the  the insuring  sum,  they  readily  approach is  to  based  on the estimates of individual banks' riskiness as assessed by the market.  Contrary to M S , R V point out assets, the  and therefore  price of the  the  that it is  post-insurance  insurance.  Accordingly,  the  future  stochastic  value  of the  assets,  they  do not  have  behaviour of the  that  to  impinges upon  make  assumptions  about how the values of the assets before and after insurance are related.  The  model that  model  and the  I  am  going  model of Ronn  to  develop  in section  and Verma.  VII closely  Minor modifications  follows  Merton's  will be made in  PREVIOUS RESEARCH order to fit the  situation in Hong Kong and the data  set.  / 8  M y model will also  cover the pricing of government guarantees on advances made by the banks.  III. Following  the  there  has  been  Kong  prior to  behave  philosophy  of  BACKGROUND  active  minimal government  non-interventionism  laissez-faire  policy,  supervision in the banking industry in Hong  The presumption of the  1986.  and  regulator  was  that  bankers would  in good faith. It is under such ideology and presumption that the banking  system of Hong Kong evolved to its current state.  Unlike  most  Affairs  major  Branch  of  whenever  necessary  privately  owned  economies, the  Hong Kong  Government  has  no  Secretariat  central  carries  bank.  out  The Monetary  central  bank  duties  through the Hong Kong Government Exchange Fund and the  Hong Kong  & Shanghai  Banking Corporation  (henceforth  Hong  Kong Bank).  The  deposit-taking  since  banks,  companies.  At  Under this  1981.  licensed  the  sector  licensed  in Hong Kong, system,  there  are  deposit-taking  three  In addition, there are representative  end of  1985,  there  were  may operate  all types of banking business.  of the  established  of  under  distinct and  a  three-tier  classes  of  registered  structure  institutions:  deposit-taking  o f f i c e s of foreign banks.  1 4 3 licensed  maintaining a total  was  been  companies  incorporated)  members  has  banks  1,394 offices  ( 3 5 of them  in Hong Kong.  being  locally  Licensed banks  All licensed banks are required to be  privately run Hong Kong Association of Banks. The Association in  charges.  Moreover,  deposits  of  original  January the  1 9 8 1 to  Association  maturities  up  monitor  sets to  the  banking  maximum  1 5 months  9  less  standards rates a  day.  and  payable But  regulate on bank  deposits  of  BACKGROUND / HK$500,000  or  above  for  less  than  three  months  term  to  maturity  are  10 not  restricted by the ceiling rate. Banks may compete freely for these deposits.  Licensed banks.  deposit-taking  They  amounts that  may  of  they  not  also  less  may  companies take  than  offer.  are  deposits  usually of  any  HK$500,000.  A t year  end,  merchant  No  1985,  maturity ceiling  there  banks  from  or  the  investment  public,  but  in  is  set  on  the  interest rates  were  35  licensed  deposit-taking  to  taking  companies.  Registered  deposit-taking  HK$100,000 months.  As  or  with  are  original  restricted term  there were 278  to  maturity  registered  of  deposits  at  least  deposit-taking  of three  companies.  provided for by the Banking and Deposit-taking Companies Ordinances and as by  the  Commissioner supervision  the  of  office  obtains  branches  Banking Regulations  is  institutions.  Hong  of the  Kong  revised  The  authority  who for  international  is the  also  banks  division  by  and the  the  prudential of  and sends examination  Concordat issued  and Supervisory Practices  Bank,  the  Banking,  incorporated  and the principles of world-wide  Kong  of  monthly returns from,  of  in Hong Kong are accepted  Hong  Commissioner  Companies,  deposit-taking  The principles  Switzerland),  The  Deposit-taking  all  overseas  companies.  Governor,  of  Commissioner's  The  an  A t the end of 1985,  appointed  to  more  companies  the  teams  deposit-taking Committee  on  (which meets regularly at Basle in supervision of banking groups  based  and practised.  which  issues  around  80  per  cent  of  the  notes  in  BACKGROUND / circulation performs  (the  other  20%  some of the  is  functions  the  de facto central bank. It  the  lender  of last  necessarily owned  take  issued  is  the  However  the  of  corporation, it  role  has  to  the  Standard  Chartered  of a central bank and thereby  resort.  on  by  banker of the it  the  should be  government  noted  lender of last  consider  its  own  is  that  resort.  benefit  and  also  recognised  and,  the  As  Bank),  11  as  sometimes,  bank does  it is  not  a privately  commercial viability  first before lending a helping hand.  This  is  Seng  evident  Bank  in the  was  a  case of Hang  well-established  Chinese merchants. It was Hong  Kong  caused  by  Bank.  In  continuous  Hang  huge  for  financial  Seng  Bank  Seng  cash  withdrawal of deposits.  Bank  and  well  also recognised  1966,  rumours. The  Seng Bank  as  in  organised the  Bank  reserves  1966.  bank  strongest  was of  At that  bank  owned  business  suffering  the  time,  from  by  Bank  a bank run  could not  meet  support. Through negotiation,  competition by  successful  the  to the  in establishing  acquiring Hang  the  So Hang Seng Bank turned to the Hong Kong  sold their controlling interest  was  local  rival of the  major shareholders  Hong Kong  Bank.  In  of Hang exchange,  the Hong Kong Bank agreed to support the distressed bank. Therefore, the Kong  Hang  the  Seng Bank.  largest  It was  deposit  also  base  successful  Hong  and reducing in performing  its role as the lender of last resort.  Another  distinctive  feature  is the  absence  of deposit  insurance. Before  1983,  the  Hong Kong government did not take an active role in solving banking crises and bank  runs. The troubled banks were  Seng Bank  in  1966)  either  or liquidated (e.g.  acquired by other  banks  (e.g.  Hang  Ming Tak Bank in 1966). On September  B A C K G R O U N D / 12 27,  1983,  the Hang close  a  medium-sized  Lung Bank,  business  was  partner, the  non-listed  bank  in distress  controlled by  due  to huge  Standard Chartered  any further credit, but also  some  overseas Chinese,  fraud-related loan losses.  Bank,  not  demanded covering for the  only  Its  stopped granting  outstanding balance. The  situation deteriorated quickly and led to a bank run. Consequently, a number of other smaller banks which had close business  relationships with the troubled bank  also suffered heavy deposit withdrawals.  Coincident to this Hong  Kong,  crisis  of Hang  was  as  an increase in public concern about the political future of  Britain Lung  and  Bank  people.  In order to restore  forced  to  intervene.  government,  The  China  began  intensified  the  the  setting  troubled  bank  Hang  up  well-managed to set  Lung  as  incidence,  many  well as the  largest  One  arguments  deposit  of  the  insurance  large banks was  up deposit  Kong Bank was  the  1997  problem of the  issue.  The  Hong  Kong  was  wholly  taken  over  Douglas Blye, was  scholars  in  interest  Hong  Kong  extremely  the  appointed as  of the  advocated  depositors.  banks (both local and foreign) against  huge  by  was  of the bank was then resumed.  up of deposit insurance to protect the  suggestion.  setting  was  and Secretary of Monetary Affairs,  government, the  confidence  on  stability in the financial market, the government  the bank's new chairman. Normal business  After  negotiation  insurance  and  the  small.  It  was  chance was  insurance. Another major argument as  of  But the  did not  that  the  failure  therefore expressed  the  accept cost of  for  the  not economical by the  Hong  that it was not fair to force the majority of relatively safe and  well-managed banks to subsidize the few high-risk banks.  BACKGROUND / While the debate the  on the issue of deposit insurance began to cool down in  Overseas Trust Bank enter financial distress  loss later estimated  to be over H K $ 3 billion which had not been revealed in the  audit.  principal  subsidiary, the Hong Kong Industrial and Commercial Bank  the  Once again,  the  government  took  over  the  bank as  as  its  on June  7,  disruption in  stock market, and stock trading of the two banks had to be stopped. Months the  healthy  Hong  and  Kong  stock  drop  (from $3.80  from  the  Industrial & Commercial  trading to  resumed.  $0.91)  shareholdings  in  which its  But was  parent  the  Bank stock  was  company,  the  been  officials  have  charged  with  bank  was  huge,  the  government  1985,  reportedly bad  loans.  especially Tan's  K a Wah Bank which was  had its  capital  The bank has those  companies  Singapore-based  and reserves been  had to  was  Investment  acquired by Corporation  Bank.  The Four  alleged  dubious loans. As the loss  pump around HK$2  billion into  thereafter.  of  about  HK$550 million wiped  out  by  a heavy lender to Malaysian-controlled companies,  linked  Pan Electric  another  Trust  owned by the Law family of Singapore,  with  tycoon-politician  Industries  number of bad and doubtful loan accounts. Wah  capital losses  to defraud or  the bank as new capital. Previous shares became worthless  late  to  the  substantial  commercial fraud.  conspiracy  criminal irregularities involving the granting of massive the  a  Overseas  former  financially  showed  partly attributable  of Overseas Trust Bank was  senior  considered  price  major cause of the collapse  In  well  As both banks were listed banks, the event caused a serious  later,  of  1985,  as it had incurred a cumulated  previous  1985.  13  collapsed,  Subsequently  financial institution,  (henceforth  CITIC),  of  the  Tan Koon the  bank faced  on April  China  Swan.  21,  While a  huge  1986, K a  International Trust &  People's  Republic  of  China.  BACKGROUND CITIC's buyout, the of  a  troubled  demonstration  first time  Hong  of  Kong  China's  system of Hong Kong. provisions as Fund.  In  that  China has  financial  buyout,  words,  any  to  subsequent  In  faced  Union  Bank  an  Coopers & Lybrand, concerning the few  months  deposits  and  further  bad  loans.  (after  in  of  the  as  acquired by  from  the  a  banking  making bad debt  Government's Exchange  this  existing  loan  portfolio  audit query raised by the bank's auditor,  possibility of the recovery of certain loans. A  Eventually,  the  government  declared  run on  the  bank  extended  also directed Jardine Fleming, a Hong Kong based  merchant bank, to assume management  interests  stability  hailed  and a line of credit with amount not disclosed was  to the bank. The government  was  loss  been  take control  later, the bank faced liquidity problems due to a subsequent  technically insolvent  Bank  the  loan portfolio  loan  government.  1986,  has  guaranteed by the  would be recovered from the  early  protect  the  at the buyout date) was  other  institutions,  determination  In the  moved in directly to  / 14  Modern  Mainland.  of the  Concept  Again,  the  bank. On June  Limited loan  which  portfolio  is  28,  1986,  composed  was  of  guaranteed  Union Chinese by  the  Exchange Fund.  During the period 1985-86, there were some other small non-listed bank failures; for  example,  the Wing On Bank which was  In  all the  by  the Exchange Fund of the  On  April  takeovers,  1,  1986,  the  loan  portfolios  taken over by the Hang Seng Bank.  of the  problem banks  were  guaranteed  government.  Financial Secretary John Bremridge defended  such intervention  B A C K G R O U N D / 15 in  traditionally laissez-faire  only  to  protect depositors  Hong  necessary,  The  Robert  caused  Fell  added  that  the  by  stability  subsequent  of  the  bank  the  were  taken  and international confidence  government  financial system failures.  transition prior this  to  Normal  would  act  in  Banking again,  if  1997  successful  in  guarantee  a  such  unconditional  incentives,  such  guarantee,  existing  as  moral  to  protect  heavy  the  hazard  and  can  British  burden on  guarantees  management  problem banks  economic stability during the  official reserve for maintaining the linked exchange  Moreover,  the  is  government is to a certain extent political in  as  poses  of  is restored. It is important to note  to maintain the so  was  and in minimizing the disruption business  and public confidence  The government has  However,  actions  through unconditional guarantees  that the guarantee granted by the  of  the  rather than to bail out bad management.  intervention  almost totally unaffected  nature.  that  to prevent a bank collapse.  government  restoring  He stated  and maintain domestic  Hong Kong's banking system, Commissioner  Kong.  may  adverse  take  the  and  China's  Exchange  years  interest.  Fund  -  the  rate system of Hong Kong.  result  in  selection.  in deposits  at  adverse  With the  managerial  the  presence  riskless  rate  of  even  when deposits  are risky. This is due to the fact that when the bank fails, with  the  given to  guarantee  deposits  without  management,  and  any the  the  new  losses.  management,  This  subsidiary  is  depositors can still get  exactly  increases  with  a  subsidiary the  existing banks are likely to take on risky investments.  level  of  to  back their  the  risk.  existing  Therefore,  This excessive risk taking  behaviour can hardly be controlled under the present system.  IV. The  DEPOSIT INSURANCE  government's  criticised deposit  by  policy  many  of  AND GOVERNMENT  granting  scholars,  unconditional  especially  insurance. Their argument is  those  : since  guarantees  arguing the  GUARANTEE  for  has  the  no  lunch"  obligation would  to  only  grant  result  a  in  "free more  lunch" to bank  problem as mentioned in the previous  The  problem of  "free  lunch" may  appropriate incentive  from  private  bank's  actions,  action.  scheme.  can  Alternatively,  it  solved  during that  is  out-of-pocket  not  entirely  an  be  by  because  guarantee,  not  then it  banks.  Such  of  moral hazard  the  a  "free  a  pricing mechanism.  But  the  pricing mechanism does not provide  may  solved be  if  the  eliminated  regulator by  an  can  monitor  appropriate  the  incentive  follows: A t the beginning of each period, the  with a flat premium. A t the end of the period,  a portion of the  individual riskiness  failed  has  of  section.  be  only  the institutions  regulator refunds  establishment  excessive risk-taking. Since moral hazard results  One suggestion is given as  regulator charges the  it  against  the  failures  problem of moral hazard will remain-- if the the  strongly  Hong Kong government  charged the failed bank anything prior to the granting of the has  been  premium to the  period. Since expense,  the  institutions  based  premium paid at the  it becomes  relevant  in  the  on the  beginning decision  of  risk-taking. Also, as the price (flat premium - refund) required to be paid by the banks is based level  of  optimal  risk-taking policies  on their relative  as  that  risk.  such  a  increase  t I am grateful to me.  that  riskiness,  Consequently, pricing structure  bankruptcy risk.t  the  banks  will have  banks  forces  may  banks  The detail  to  to  try  to  assume a certain avoid  internalize  of such  a  excessive  the  scheme  is  costs  of  out  of  Prof. R. Giammarino & Prof. J . Zechner pointed this  16  out  DEPOSIT INSURANCE  AND GOVERNMENT  GUARANTEE  / 17  the scope of this paper and so will not be discussed herein.  Before  I  existing  proceed measures  interventions, necessary  of  namely,  it  is  useful  interventions guarantees  guarantee  doubtful  on existing  debts  to  other words, it is  new  first  Hong  explore  Kong.  existing  of the  the  date  are  two  granted  of  to  the  "potential"  been  take-over.  a put written by the  government  intended to prevent  to  cleared  out  from  the  portfolio)  as  the  promised payment of those loans as the exercise price.  a guarantee  loan  new  of the bank with the loan portfolio (all the bad  has  management/shareholders.  the  of  making all  on the existing  Thus  future  loan portfolio acquired by  loan  losses  on  the  existing  portfolio are guaranteed by the government so that the bank will not be by  the  types  loan portfolio (after  acquisition date)  loan portfolio is  implications  There  of the failed banks and, a direct government  underlying asset and the In  in  as  the new management/shareholders and  to  on the  loan losses provisions  managements  The  further,  losses  future  left  by  the  old  management.  This  bank failure due to loan losses on the  the loan  affected  action  existing  is  loan  portfolio.  Direct government takeover is the last alternative that the government pursue in order to restore banks,  the  takeovers  stability.  government  When  is  there  forced to exercise  this  price".  Because  none  of  the  private sector  acquired  distressed  option of direct take-over.  are intended to be temporary in nature. As stated  those banks will be sold back to the best  is no appropriate buyer for the  banks  by the  "as soon as have  been  government,  possible sold,  The  it  at  the  is  not  DEPOSIT INSURANCE possible  to foresee whether  guarantee  on the  loan  the government would, in the  GUARANTEE /  event of sale,  18  grant a  loan portfolio as. it did in the other bank failure cases. If the  government grants and  AND GOVERNMENT  such a guarantee,  guarantee,  do  not  differ  then the two measures, in  substance  but  only  i.e.  differ  direct takeover in  timing and  government involvement.  The  system  that  Hong Kong.  Under  loan guarantee is  based  I  on  am  going  the  to  examine  hypothetical  is  system,  similar to the  government  instead of granting it "free-of-charge".  the  ante guarantee  relative  instead  risk  of  an  of the  the  existing will  system  charge  The price of the  bank concerned. Furthermore, it  ex post one.  Hence,  the  loan  guarantee  in  for  the  guarantee is  an ex  is  a  put  written by the government to the bank with a striking price equal to total debt, to  be  scaled  down  by  distinction between the government  is  the  proposed system  that  the . former  management/shareholders  The  most  advances  is  the deposit latter  is  that,  It  is  put  difference  in the  an  indirect  written  measure.  is  a  put  note  between  deposit  terminology of options,  to  the  insurance is a direct measure is  total  assets.  One important  written  issued by the  to  the  existing  In  that  the  term  "guarantee  on  insurance  and  guarantee  on  the former is a put written by  government)  bank's  to the  shareholders.  depositors It  follows  of protecting depositors but guarantee  the  new  I proposed above.  insurance corporation (the a  to  and the existing guarantee  important to  for the system  apparent  loans  of the bank but the latter is a put written to the  management/shareholders. advances" stands  proportion of  remaining part of  this  section,  I  whereas that on  the  deposit advances  am going  to  , DEPOSIT INSURANCE A N D G O V E R N M E N T  GUARANTEE /  19  compare the two in the following aspects:  1. Effectiveness i n Protecting Depositors One is  may argue that loan guarantee is not effective true  only  when  insures  cannot  the the  maintain  cause  of bank  failure is  loan portfolio of the the  assets  value  other  in protecting depositors. than huge  bank but not  of  the  bank,  other  loan losses.  assets,  hence  it  the  cannot  This As  it  guarantee  protect  the  interest of depositors in this case. But  under  the  Banking  Ordinance of  materially engage in business  Hong  Kong,  banks  are  not  allowed  other than lending and deposit-taking (similar types  of regulations also apply in other advanced countries). That is to say, of  losses  failure.  on assets  It  is  worth  other  than  noting  that  advances  is  under  the  significant portion is interbank placements bank is covered by the interbank placements  loan guarantee  the impact  small and unlikely to lead to bank broad  category  of  other  assets,  (interbank short-term deposits). system,  the  chance  guarantee  can  a  If every  for having losses on  due to other bank's default is minimal.  Since the possibility of having other risks affecting the bank's resources loan  to  be  considered  to  be  as  effective  as  deposit  is small,  insurance  in  protecting depositors.  2. Transactions Costs i n Case of Bank Failure If  there  between  exists failure the  an  unspecified  and  liquidation, the  higher  in  case  of  deposit  deposit  insurance, depositors  are  linkage  to  transactions  insurance the  (due  than  some  forms  costs that  sole and ultimate  of  of  of  bank  loan  imperfections) failure  will  guarantee.  beneficiaries.  In the  be  Under case  DEPOSIT INSURANCE of  a bank failure, the  insurance  the bank and pay for the and  the  losses  proceeds  of  the  from  corporation has  insured deposits.  the  insurance  AND GOVERNMENT  sales  of  corporation.  its  to  over  all the  The failed bank has assets  Since  take  G U A R A N T E E / 20  are  used  liquidation  for  assets of  to be liquidated compensating  involves  transfer  of  the legal  title, substantial legal costs have to be incurred. Under i.e.  the  system  advances,  substantial  are  bad  transactions  of  guarantee  insured,  debt  on  the  losses.  advances,  bank  As  no  will  because  not  be  liquidation  the  bank's  affected  procedure  even is  major when  assets,  there  is  involved,  the  huge  insurance  and loan  costs in liquidation can be avoided.!  3. Subsidies to Shareholders and Economic Efficiency Merton  [1977] in the  guarantee, expensive  points and  course  out  more  that  of deriving the  guarantee  efficient  gives no logical argument  than  for  on deposits,  guarantee  such  cost of deposit i.e.  on the  a conclusion.  deposit loans  insurance,  made  by  is  banks.  His apparent reason  acceptability.  As  of  deposits.  out  It  is  above, indirect  assets, which in turn,  loan  guarantee  in the  sense  maintains  is that  an it  indirect measure maintains  the  the value of the deposits.  value  protection of the  Since it has  system.  Because  risk-takers  they  shareholders  are  the  in  the  market,  it  is  should not be protected from the losses due to their own faulty  decisions.  t  the  If  the  ultimate  aim  of  the  regulator  is  to  protect  I am grateful that Prof. M . Levi pointed this out to me.  to  for  bank's a direct  impact on the bank's assets, it is believed that the benefits of shareholders also be partly protected under this  He  seems  be the widespread use of such deposit insurance and its general pointed  less  argued  may  that  investment  depositors,  loan  DEPOSIT INSURANCE guarantee  is  more  subsidizing the guarantee  costly  than  shareholders  system  is  deposit  to recover  not  AND GOVERNMENT insurance  since  a portion of their  economically  efficient,  GUARANTEE  and  the  government  losses.  the  / 21 is  Therefore, loan  same  conclusion  as  Merton's [1977] is arrived. As  I have  mentioned  the transactions the  regulator  systems.  earlier, in case of failure and given  costs of deposit therefore  The optimal  has  policy  specific  conditions,  insurance is higher than that of loan  guarantee,  to  compare  should be  the  the  costs  one  and  which  the  benefits  maximizes  of the  the net  two social  benefits.  Before I evaluate  the relative  important to make  suitability of the two systems in Hong Kong, it is  clear the  ultimate  aim of the  quoted earlier in Section III, the government intended confidence  to  "prevent  bank  collapse"  and  bank, since  in the  view  of the  With the  ultimate  aim of the government  advances  is  failure  is  government  accompanying liquidation  because  smaller.  and political implications  in the  growth and prosperity of the economy  foregone.  of  the  problem may  be the first to be  case  that  and international  of the general public. The confidence  Hong Kong. The steady economic  measure  clear  government  or liquidation  far reaching economic  a better  stated that the  with its any  regulator). As  bank collapse  magnify  in  So it is  government,  confidence  and have  (the  "maintain domestic  prevention of a bank collapse  will undermine the  of  officials  in Hong Kong's banking system".  is aiming at the of  a  government  the  future may  in mind, it is clear that guarantee possibility  Moreover,  as  on  of having banks liquidated  this  system  requires  fewer  DEPOSIT modifications  over  the  without incurring huge  INSURANCE AND  existing  system  adjustment costs.  in  GOVERNMENT  Hong  Kong,  it  GUARANTEE / 22 can  be  implemented  V. As  STRUCTURE  the  disclosure  Canada, typical the  it  is  requirements  necessary  bank's balance  balance  However,  sheet  the  OF TYPICAL  of  to  of  BANK  BALANCE  Hong Kong  describe  the  are  basic  classification  Hong  is never  Kong  very  made  and  a rigid one  IN H . K .  different  structure  sheet. The classification the  SHEET  and  in this  Shanghai  from  that  classification  section  of  is based  Banking  in a on  Corporation.  and each bank can decide  on a  different order of liquidity.  1. Classification of Assets 1.  Cash in hand and balances  with other banks.  This includes: a.  Cash in hand (Hong Kong dollars and foreign monies);  b.  Balances with banks in Hong Kong repayable on demand;  c.  Nostro  balances,  i.e.  balances  in  a  foreign  currency  with  overseas  banks; d.  Vostro  overdrawn  balances,  i.e.  overseas-  banks  overdrawn  their  accounts; e.  Call,  short  and  term  deposits  with  other  bankers  and  financial  institutions; f.  Bank certificates  g.  Gold bullion.  of deposit;  This line of the balance sheet represents 2.  assets of undoubted quality.  Bills receivables. This  would  include  import  and  export  purchased by the bank.  23  bills  of  exchange  financed  or  STRUCTURE 3.  OF TYPICAL BANK  B A L A N C E SHEET  Advances to customers and other accounts  IN H . K . /  24  less provisions.  This includes: a.  Customers overdrafts;  b.  Mortgage loans;  c.  Other commercial loans;  d.  Silver and other commodities;  e.  A l l other debit balances including interest  And  the sum is deducted by:  a.  Provision for bad and doubtful debts.  receivable.  This item in the balance sheet is normally a material figure and represents the  least liquid of the bank's dealing assets.  any  number of years.  shown  as  material  a  separate  and  the  In some item  asset  instances,  in the is  held  silver and other bullion may  balance by,  Commercial loans may be for  sheet if the  say,  another  be  amount involved is bank  or  reputable  custodian. 4.  Investments. It  is  a  exempted 5.  Interest  common  item  in  all  kinds  of  balance  sheets,  from disclosing the market value of its quoted in  subsidiary  companies,  amount  due  from  but  banks  are  investments.  holding  company  and  fellow subsidiary companies. 6.  Fixed assets. This  includes  property and equipment  fully written off. 7.  Liabilities of customers for engagements. This includes:  to  the  extent that  it has  not  been  STRUCTURE  8.  OF TYPICAL BANK  B A L A N C E SHEET  IN H . K . / 25  a.  Unused letters of credit issued on behalf of customers;  b.  Acceptances on bills of exchange on behalf of customers;  c.  Guarantees issued on behalf of customers.  Forward exchange contracts receivables These  are  forward  contracts  entered  by  the  bank  to  purchase  currencies on behalf of customers or to cover its foreign exchange  foreign  exposure.  2. Classification of Liabilities 1.  Share capital.  2.  Share premium.  3.  Reserves.! The  disclosed  reserves  non-distributable reserves non-disclosed  inner  of  a  bank  need  not  show  the  distributable  separately, as well as the movements  reserve  is  included  under  "Current,  and  therein. The  deposit  and  other  accounts". 4.  Minority interest.  5.  Current, deposit and other accounts. This includes: a.  Current accounts of customers, other banks and financial institutions;  b.  Deposit accounts of customers, other banks and financial institutions;  c.  A l l other accounts and  6.  and provisions, including the  provision for taxation  any inner reserves.  Engagements on behalf of customers/forward exchange contracts payable. These are the counterpart of "Liabilities of customers for engagements"  t They are usually retained earnings deposit reserves.  and other capital reserve  and  account, but not  STRUCTURE  OF TYPICAL BANK  BALANCE SHEET  IN H . K . /  "Forward exchange contracts receivable" respectively as mentioned above.  VI. T H E M O D E L The  model in my paper closely  Ronn  and  Verma  [1986].  follows  Merton's model [1977] and the  Modifications  have  been  made  in  order  model of  to  suit  the  situation of Hong Kong and the data set available.  1. The Current Asset Value of Banks and Their Variance Black  and Scholes  price the pure are  [1973] suggest that  debt and equity  the  of a levered  firm.  discount bonds which prohibit any paid  off.t  At  maturity,  the  option pricing model can be used Assume  that:  dividend payments  bondholders  are  paid  (1)  The firm  until (if  after  behaviour finite  of the  time  value  interval  is  There are of the  homogeneous  firm's  expectations  assets; the  lognormal with  a  about  distribution at  constant  variance  bonds  and  residual belongs to the shareholders. (2) The total value of the firm is by capital structure. (3)  issues  the  possible),  to  the  unaffected  the  dynamic  the end of any  rate  of  return.  (4)  There is a known constant riskless rate.  According to Black  and Scholes,  call  asset value  option on the  the  equity  of the  firm  of a firm with the  can be same  represented  maturity as  the debt of the firms, and with a striking price equal to the  as  a  that  of  maturity value of  the debt. From put-call parity, value of call  Because be  t  +  present value of striking price =  value of put +  share price.  common stock is a call written on the firm's assets, "share price" must  interpreted  as  "asset  value".  Also,  "present  This assumption can be relaxed. 27  value  of  striking price" is  the  THE  MODEL  / 28  present value of the promised payment to the debtholders at maturity. Thus value of call  +  present value of promised payment to debtholders  value of put +  =  asset value.  Rearranging terms, value of stock +  =  asset value - present value of promised payment to debtholders  value of put.  So  whenever  a  firm  with  limited  liability  borrows,  the  stockholders  have,  in  effect, 1.  bought the firm's assets,  2.  borrowed the present value of the promised payment from the debtholders,  3.  bought  a  put  on  the  firm's  assets  with  the  to  escape  striking price  equal  to  the  promised payment to the debtholders. Having  the  put,  stockholders  are  allowed  the  consequences  of  their  and  other  promise to repay the debt to the debtholders.  In  the  context of  this  model,  the  debt  of  the  bank  is  the  deposit  non-deposit debt liabilities. Hence, following the Black-Scholes option pricing model, I have E  =  VN(f|)  - BN(f ) 2  where f, =  {ln(V/B) + (Sv T)/2}/(Sv^T) ,  f =  f,-  2  2  SWT ,  E  =  the equity of the bank,  V  =  the asset value of the bank,  (1)  THE B  =  the face value of total debt of the bank,  T  =  time until next audit of the bank's assets,  Sv  =  instantaneous  M O D E L / 29  standard deviation of the rate of return on the value of the  bank's assets.  It  may  first  be  noted  equation  (1).  In  the  interest enters  that  the  risk-free  Black-Scholes  only in the  rate  option  of  interest  pricing  factor with which the  model,  does the  not  appear  risk-free  in  rate  of  striking price is discounted.  In  other words, it is only the present value of the striking price that is relevant to Black-Scholes option pricing. Since the face value of the debt (i.e. present value of the striking price in my context,  deposits) is  the  the risk-free interest rate does  not appear in my computation in equation (1).  As pointed out by Merton  [1977], the model assumption of a term-debt issue  not strictly applicable because  most deposits  in a bank are of the  is  demand type.  However, if one interprets the length of time until maturity, T, as the length of time until the the  next  guarantor (the  demand  deposits.  audit of the regulator),  In  other  bank's  the  words,  assets,  then from  structure of the from  the  point  the  point of view  model is reasonable of  view  of  the  even  of for  guarantor,  deposits can be treated as if they were term and interest bearing.  In equation (1), there are two unknowns, namely, the current asset value of the bank and the instantaneous of the  bank's assets.  the two unknowns.  standard deviation of the rate of return on the value  Another equation is  therefore  needed  in order to solve for  THE  M O D E L / 30  It can be shown that (&E/&V)(V/E)  =  Se/Sv  where Se  =  the  instantaneous  standard  deviation  of  return on  E , which  is  readily  observable. By rearranging terms, Se  = {SvV(dE/dV)}/E  so Sv  =  (SeE)/{VN(f )}  By  solving  (2)  (  the  simultaneous  equations  (1)  and  (2),  the  solution  pair  (V,  Sv)  in  the  which is originally unobservable can be obtained.  The  current  market  value  of  the  bank's  assets,  attempt of assessing the "fair" price of guarantee for  other  regulatory  V,  is  a  by-product  and insurance premium. But it  has  important implications  can  be used in assessing the capital adequacy of individual banks, which can be  used to predict bankruptcy. Defining capital as total (or  debts the  example, of  smaller  the  other  debts),  debt-to-asset  value  the  the difference  larger the  ratio),  For example,  the  ratio of capital to  safer  on advances  subsections.  and deposit  the  V  between assets and  the  deposits  insurance premiums are  assets  [see,  Sharpe, 1978]. The effects of the debt-to-asset value ratio on the  guarantee  following  (deposits plus  measures.  for  prices  illustrated in the  THE  M O D E L / 31  2. Price of the Government Guarantee on Advances The  use  of  the  government use  of  allows  option-pricing  guarantee  historical, for  bank-specific price  short  periods.  the  problem  loss  estimate  The  hand  of be  assumption is  thus  the  more  the  price  using  data  palatable.  taken  the  pricing  of insurance  Basically, he follows  above  advantages  contracts the  and  into  loan  prices  of  the  relative  to  the  contingent-claims  or  premium. data  Third,  are  the  analysis  Second,  collected  collected  levered. So valuation is not based on historical losses  Having  advantages  First,  computed  that  appropriate  three  experience.  estimates  or premium can  at  to  or premium rates offers  system-wide  appropriate time  approach  over  the fairly  still relevant  options  are  to  highly  figures.  account,  Merton  [1977]  guarantees  in the  option-pricing context.  standard assumptions  of the  examines  the  Black-Scholes option pricing  model, and he further assumes that the insurance contract calls for the  payment  of a premium, y, at the current date.  If Vt  at the is  less  expiration date than  holder of the  its  of the  contract,  insured value,  policy the  difference,  the market value of the  X , then  the  insurance  X - Vt. If the  insured asset  contract  market value  will pay  the  of the insured  asset is greater than its 'insured value, then there is no payment.  Thus at the maximum  of  expiration date, either  the  difference  value of the asset, or zero: Y  =  max[X - Vt, 0].  the  value of the insurance contract, Y , will be between  the  insured  value  and  the  the  market  THE This  contract  exercise  price  is equivalent  to a European  set at the insured value  case of guarantee  on advances,  put option  of the asset.  M O D E L / 32  on the asset  with an  The insured asset in  the  is the loan portfolio of the bank. The exercise  price is the total debt of the bank scaled down by the proportion of advances to total assets.  The price of the guarantee, denoted by G , is then given by G  = (D/V)BN(h ) - D N ( h , ) 2  where h,=  {ln[(B/D)(D/V)] - t/2}/Jt = {ln(b) - t/2}/Jt ,  h =  h, + Jt ,  2  t  = S v T is the variance of the logarithmic change 1  during the terms of deposits  in the value of the assets  and advances,  D  = the discounted value of the advances, i.e. the face value of the advances,  b  = B / V is the current debt-to-asset value ratio.  The  price  of the guarantee  per dollar  of advances,  denoted  by g, which is  defined to be G/D, can be expressed as a function of two variables: g(b,t) -  b[N(h )] 2  - N(h,)  As one would expect,  the change in the price with respect to an increase in the  debt-to-asset value ratio is positive. The change increase the  in t is also  asset  value  positive.  in the price with respect to an  Hence, an increase  or the length  of time  increase the price per dollar of advances.  that  in either  the variance rate of  the guarantee  is in force  will  THE As  indicated  risk-adjusted.  above,  this  price  The higher the  of  risk  the  guarantee  per  of the bank, the  dollar  higher the  MODEL / 33  of  advances  price charged. If  the government charges such a price on the guarantee rendered, the of  the  banks  are  likely  to  act  more  prudently and  so  is  excessive  management risk-taking  is  prevented.  3. Deposit Insurance The of  case the  of deposit  Premium  insurance premium is  price of guarantee  insured value  is  the  difference  present  value  between  the  of total debt,  two  in this  face  value of total debt. There is a little complication at this point because  public,  the  The main  that  necessary  case  on advances.  similar, but not identical, to the case  to divide total debt into two parts. One is the deposits  B | , which is  insured. The other part  is  all the  i.e.  is the  it is  of the general  non-deposit  liabilities of  the bank, B . Total debt is denoted by B. The value of the put, P, is given by 2  P  B, N ( k  =  3  )  -  [(VB,)/(B,  +B )]N(k.) 2  where k, =  {ln[B,/(VB,/B)]-t/2} I At  k  =  k, + „ / t =  =  B / V is the current debt-to-asset  2  b  Therefore,  the  =  {ln[b]-t/2} Ut  =  h, ,  h , x  cost  of  the  insurance  value ratio. per  dollar  of  insured deposit,  d which  is  defined to be P / B i , can be written as a function of two variables: d(b,t) The  =  N(k )  change  2  - (l/b)N(k,)  in the  cost  with  respect  to  an  increase  in  the  debt-to-asset  value  ratio is positive. The change in the cost with respect to an increase in t is also positive. Hence, an increase in either the variance rate of the  asset value or the  THE length  of time  that  the  insurance  is i n force  will  increase  MODEL /  the  cost  per  and  deposit  one,  then  dollar  34 of  deposits.  Comparing the  the  =  formulae  the  debt-to-asset  guarantee  are  of guarantee  on  advances  insurance,  is revealed:  bd(b,t).  insurance two  pricing  following relationship  g(b,t) As  the  per  premium  value  r a t i o , b, i s a l w a y s  dollar per  of  dollar  p r o p o r t i o n a l to e a c h  advances of deposits.  other.  is  smaller always  Another  than  smaller  point  worth  than noting  the price of the  deposit  is that  the  VII. DATA For  the  stock  purpose  prices  collected.  and  of this  study,  financial  six  years  statements  Current asset values  data  of  (1980-85)  the  eight  on  the  listed  weekly  banks  and, point estimates of deposit  closing  have  been  insurance premium  and price of guarantee will be calculated based on these data.  The four non-failed banks are: 1.  Hong Kong Bank;  2.  Hang Seng Bank;  3.  Bank of East Asia; and  4.  Wing Lung Bank.  The four failed banks are: 1.  Overseas Trust Bank;  2.  Hong  Kong  since  1981);  Industrial  3.  K a Wah Bank; and  4.  Union Bank.  One important note is the  &  Commercial  Bank  (listed  on  the  stock  exchange  different financial year for the sample banks. Two of  them, namely, the Hong Kong Industrial & Commercial Bank and Overseas Bank  have  a financial year ended on June  30.  Other sample  banks have  Trust their  financial year ended on December 31. Another important point is that the  figures  of  banks'  "Current,  deposit  and  other  accounts"  on  the  liability  statements are used as proxies for their deposit figures.  35  side  of  the  VIII. E M P I R I C A L By  employing  Statistical  the  subroutine  Library  The  two  Se.  With  (IMSL),  unknowns the  government  ZSCNTf  equations  V and Sv  solution  guarantee  FINDINGS A N D R E S U L T S  pair  on  (1)  can (V,  of  and  then  be  Sv),  advances  the  International  (2)  be  solved  the  estimates deposit  of  the  insurance  in sections VII. 2 and VII. 3.  This  of  For  the  (HKIC), (UB),  is  failed  banks,  Overseas  point  repeated  each  namely,  Trust  estimates  for  for  Bank the  the  the  Hong  (OTB), year  sample  Kong  Ka  1985  banks  Industrial  Wah Bank are  on  not  price  an  of  the  annual  be  basis.  & Commercial Bank  (KWB) and  shown  E , B, and  premium can  computed by employing the equations  procedure  and  simultaneously.  found for each observed  point  and  can  Mathematical  because  Union  Bank  balance  sheet  data were. not available until those banks were taken over.  The  results  banks  are  over  the  ranked  study  in  period  descending  are  shown  order  rankings by the prices of guarantees  of  1981.  There  findings  a number of interesting  their  Table II annual  are the same as  with a small exception in the year  are  in  to  Table VII. The  deposit  premiums.  The  that by deposit premiums,  in those results.  First,  as  shown  Table VIII, all the non-failed banks except the Hong Kong Bank (HKB) have market value  consistently  their market value average  figures  for  higher than the  lower than the the  two  book value.  book value  groups.  As  prior  depicted  All the  failed banks  the have  to failure. Fig. I gives  from Fig. I,  on  average,  t The purpose of the subroutine is to solve a system of nonlinear equations. this study, double precision is used. 36  in  the the In  E M P I R I C A L FINDINGS A N D R E S U L T S book  values  of  failed  banks,  book  values.  tend  to  banks  the  the  increase given  consistently  lower  banks'  market values  Moreover, the  are  term)  non-failed  as  of their  differences  approaching  in  Fig.  than the  between book values  assets  II.  to  It  are  assets usually  between the  is  book  failure  found  book value.  stated  As  a  short  The  the  of all the  For  the  of the  stated  and market  values  cases  H K B has  whole,  and market values  fall  values  date.  that  conservatively.  / 37  its  of individual market  differences sample  (in  value relative  banks  are  stable over time. In other words, the regulator cannot approximate market  not  values  based on the reported book values.  Second, in  Fig. I and II both indicate  market value  in the year  1982.  that  all banks  experienced  substantial  drops  The drop is attributable to a common factor,  i.e. the political uncertainty in the future prospect of Hong Kong. Because  of the  drop  shows  in  market  sharp increase  Third,  as  value,  the  debt-to-asset  in that year (see  shown  in  Table  IX,  the  other two  lowest.  for  the  the  in  interesting  Fig. III.  period  Wing  observation  1981-1984,  The  annual  premium since  average  1984  Lung Bank  is  non-failed group both increased in 1983. drop in average  individual bank  the  two  (BEA) and Hang Seng Bank  non-failed group is higher than that  given  for  annual deposit premiums. However, the average  non-failed banks, i.e.  A more  ratio  Fig. V).  banks, namely, the Bank of East Asia the highest average  value  that  the  of the  average  of  (HSB) have premiums for  (WLB) and H K B , are  the  the  annual premium for  failed group.  premiums  non-failed  A clear picture  failed  group  and  is the  But for the non-failed group, there is a  whereas  the  premium for the  failed group  E M P I R I C A L FINDINGS A N D R E S U L T S further increased in that year because of the  increases  /  38  in the debt-to-asset value  ratio.  Fourth, the by of  average  risk of the rate of return on the bank's assets -  measured  Sv, for the group of non-failed banks is again higher than that of the group the failed banks. In fact,  respectively  as  Sv  period  for the  banks trend  are can  I rank  given be  the  B E A , H S B and W L B rank second, banks  in descending  order according to  1981-84 in Table X . The average in  found,  Fig. IV. though  For both  for  the  third and fourth  groups,  non-failed  a  Sv for the  general  group, the  their  average  two  groups of  consistent  downward  average  Sv  is  stable  over the period 1982-84.  Fifth,  all the non-failed banks except W L B , show substantial drops in Sv for the  year  1985.  In this connection,  show  substantial  found  for  the  decreases cases  of  the  for  point estimates of deposit  the  year.  Actually,  B E A and  HSB  in  estimates for K W B and H K I C show large  These  characteristics  two  large  Eda  and Carrian,  financial  can be  conglomerates  the  institutions  economy  failure of the  representing  in Hong Kong.  of  The  of the  interests  failure  non-performing syndicated the  South  Hang  East  Lung  Asia  Bank,  region.  trend  1984,  can  while  also  be  the  point  In  1983,  increases.  in terms the  a  year  of  went bankrupt, resulting in large  deterioration in other and  explained  the  such  insurance premiums  It  of  overseas  Chinese,  loan losses for most the  loans  likely  two  (e.g.  signalled is  banks' history.  the that  namely, of  conglomergates,  the  the  Associated Hotel),  vulnerability the  the  of  managements  the of  E M P I R I C A L FINDINGS A N D R E S U L T S / the  non-failed banks  they  began  to  debt-to-asset shown  in  overall  avoid  value  bank  risk  new  ratio.  Table  non-failed  anticipated  XI,  the  potential problems in the  loans  This  with  high  argument  is  risk,  and  supported  1984,  the  debt-to-asset  dropped.  Since  the  bank  managements  period of time  (because the  within  a  short  tried  by  in  value  industry. In to  the  debt-to-asset  increases  Fig.  from  the  average  It  is  shown  1981  to  1984.  and it is lower  for  all  the  plots  of  that  debt-to-asset the  ratio  failed  year  ratios  for  could loan  1985.  bank  most  not  terms  value  for  the  ratio  of  the  reduce  the  for  existing  in  other hand, 1984., Such  group  failed  and  increases  failed group in 1984.  This result is  non-failed consistently decrease consistent  above.  market  value,  book  value,  total  debt  and  deposit  for individual  banks are given in Fig. VI to Fig. XIII. It can be found that for the banks, deposit  As  1985.  for the  failed  the  for any drop  On the  increased  they faced in  lower  For the non-failed group, the ratio shows a modest  than that of the  with the argument  The  ratios  may account for the difficulties  V gives  groups.  value  apparent in the  1984,  empirical findings.  loans would usually be longer than one year), there is no evidence in Sv. However, such drop was  39  constitutes a higher percentage  in total debt as  non-failed  compared to  that  of the failed banks. A clear picture for the percentages is given in Table XII.  It seems that the  failed banks expand beyond their means  and of raising equity) and so they  (of attracting deposits  have to finance their assets with other  debts.  Amongst the various types of other debts, debts from deposit taking companies  is  E M P I R I C A L FINDINGS A N D R E S U L T S / 40 most commonly used,  and the  interest  higher than that of bank deposits. a  narrower  margin.  The  cost of this  type  of debt is  substantially  Therefore, the failed banks have to operate in  narrow  margin  or  even  negative  margin  may  also  account for their failure.  From  the  measure  empirical  findings,  in Hong Kong,  it  can  be  seen  that  banks tend to increase the  with  the  absence  of  risk  volatility of their assets by  engaging in riskier loans in the prosperous years. Also, they tend to increase debt-to-asset value debt  when  they  ratio by  are  attracting more deposits  optimistic  about  the  or issuing  more  market condition. On the  the  non-deposit other  hand,  they try to act in opposite direction when they are pessimistic.  Failures  of financial institutions,  made by managements,  or the  then,  are attributable to the  inability to reduce risk  constraints on loan term) under adverse need for the  regulator to  establish  a  the  behaviour of financial institutions  the  losses  of  such  faulty  faulty  expectations  (because of,  for example,  market conditions. Therefore, there is a  risk-oriented evaluation so  decisions/actions.  as  to In  protect fact,  the  this  scheme general  model  is  to monitor public from developed  to  serve such a purpose.  As shown in Fig. VI to Fig. XIII, none of the sample banks has fallen banks  below would  its be  total  debt.  predicted  Alternatively speaking, to  be  attributed by the following factors.  failed.  The  in  failure  this in  study,  market value none  prediction  of  the  may  be  EMPIRICAL First,  up-to-date  KWB  and U B occurred in late  year and  ended HKIC.  1984  data  cannot  December  1984  be  obtained 1985  can  information, information  then  it  set.  is  But  be  obtained.  study.  1986,  The  but only the  The actual  but only  same  is  the  true  data of the  should  to  not  predict be  a  failure  based  problem to  the  /  41  failures  of  data of  the  for both O T B  year  signal of failure is only reflected  impossible  this  this  and early  They failed in mid 1985  can be obtained. If the  for  FINDINGS A N D R E S U L T S  ended June  in the on  up-to-date  the  available  regulator  since  the  Commissioner of Banking has access to the most up-to-date information.  Second,  the  market may be  reflecting  only the publicly available  information but  not inside information. In other words, the market is strong-form inefficient. have  indicated  before,  available to the report  about  auditor has  the  fact  upward  of  the  pricing  information  turn,  On  may of  about  of the  the  take the  the  advantage bank's  value  market  other  have  provision. If the  market  the  provision  investors  not brought it to investors'  in  overestimated. information  adequacy  inadequacy,!  and  information  general public, therefore,  the  the  the  hand, of  securities  value the  this is  of  the  only  based  is  equity  bank's  assets  who  the  auditor's  has  biased  will the  be  inside  information. If  publicly  (but incorrect information), the market is only efficient  but  recognise  will be  asymmetric on  not  understated  or even failed to  bank's  of  debt  to rely on the  management  situation  bad  provision is  attention of the  for  As I  in  available  semi-strong  form but not in the strong form.  t Coopers & Lybrand, the former auditor of O T B , is sued by the new management of O T B for negligence. The small shareholders of the bank are also planning to sue the auditor for damages.  E M P I R I C A L FINDINGS A N D R E S U L T S / 42 This  argument  was  found  before  the  is  that  supported by at  collapse  least of the  and so the small investors  one  empirical facts. of  bank.t  the  In  directors  had  the  failure case  sold  the  of  O T B , it  company's  stocks  But the market did not seem to react to this  suffered from heavy capital losses.  The problem of asymmetric information and insider trading can be solved by the government. make  the  The  government  financial  can  statements  modify more  the  disclosure  informative.  On  requirements the  other  so  as  hand,  to the  government have to impose more well-defined and strict regulations against insider trading  so  as  to  protect  the  interest  of  the  small  investors.  In  fact,  the  government is considering such rules and regulations.  t The stocks sold were under the name of a nominee which represented interest of the major shareholders of O T B . This was revealed by one of financial newspapers in Hong Kong after the failure of the bank.  the the  E M P I R I C A L F I N D I N G S A N D R E S U L T S / 43  Table I. Abbreviations for the names of the sample banks. KWB  K a Wah Bank  UB  Union Bank  OTB  Overseas Trust Bank  HKB  Hong Kong Bank  BEA  Bank of East Asia  HSB  Hang Seng Bank  WLB  Wing Lung Bank  HKIC  Hong Kong Industrial & Commercial Bank  Table II. Annual deposit premiums for the year 1980. Name  V  B  Sv  Se  d  g  KWB  1,897.77  1,531.34  11.4877  52.8365  0.001536  0.001239  UB  2,104.44  1,441.52  17.9822  53.5093  0.001385  0.000949  OTB  4,663.89  4,341.27  4.1794  44.7072  0.000763  0.000711  HKB  109,092.79  87,202.00  6.8011  30.8155  0.000010  0.000008  BEA  6,366.80  5,170.61  5.7876  27.7994  0.000003  0.000002  HSB  30,028.50  16,089.50  15.3068  32.0508  0.000001  0.000001  WLB  4,656.13  3,144.75  9.1894  26.9124  0.000000  0.000000  EMPIRICAL Table III. A n n u a l deposit  Name  FINDINGS A N D R E S U L T S  / 44  premiums for the year 1981.  V  B  Sv  Se  d  g  10,664.80  7,064.41  23.8205  65.1019  0.004958  0.003284  UB  3,287.89  1,727.92  28.8224  58.6218  0.001758  0.000924  OTB  7,098.25  5,875.45  10.2146  51.9441  0.001407  0.0.01165  KWB  4,003.00  3,239.71  10.3844  48.6657  0.000886  0.000717  WLB  6,648.66  4,013.07  15.8233  38.4441  0.000039  0.000024  HKIC  2,164.38  1,709.89  7.7172  33.5780  0.000027  0.000022  HKB  133,942.58  114,023.00  4.0018  23.5411  0.000000  0.000000  HSB  39,051.60  21,543.30  11.6225  25.1496  0.000000  0.000000  BEA  Table I V . A n n u a l deposit  Name  premiums for the year  1982.  V  B  Sv  Se  UB  2,375.72  1,909.99  12.2178  55.1618  0.002012  0.001618  BEA  9,948.31  8,606.31  7.7701  48.8869  0.001010  0.000874  HSB  40,429.25  34,863.30  7.8800  48.7576  0.000988  0.000852  WLB  5,841.72  5,047.40  7.1913  45.2262  0.000602  0.000520  HKIC  2,483.19  2,098.05  7.1559  40.4676  0.000242  0.000205  KWB  4,748.63  4,327.44  4.0974  36.6798  0.000173  0.000158  HKB  152,517.66  140,002.00  3.1815  30.2873  0.000036  0.000033  OTB  8,001.90  6,311.31  7.7686  30.2873  0.000027  0.000022  g  EMPIRICAL  FINDINGS  A N D R E S U L T S / 45  Table V. A n n u a l deposit premiums for the year 1983.  Name  V  B  Sv  Se  d  g  52,073.65  43,679.40  10.4684  55.7709  0.002197  0.001843  HKIC  2,638.59  2,346.47  6.8304  50.3454  0.001268  0.001127  BEA  11,673.61  10,243.80  7.4181  50.3820  0.001245  0.001092  OTB  9,121.47  7,948.53  7.0913  46.6205  0.000754  0.000657  WLB  6,346.36  5,659.57  5.9861  45.3963  0.000677  0.000603  UB  2,468.35  2,058.13  8.6016  45.6077  0.000587  0.000490  KWB  5,470.48  5,076.91  3.3213  34.8645  0.000147  0.000136  HKB  178,348.62  166,495.00  1.8535  20.6393  0.000001  0.000000  HSB  Table VI. A n n u a l deposit premiums for the year 1984.  Name  V  B  Sv  Se  d  g  HKIC  2,737.61  2,576.53  4.6064  53.9334  0.002087  0.001964  HSB  56,978.25  46,574.20  10.7343  51.9209  0.001387  0.001134  OTB  9,571.68  8,870.50  4.3344  44.4839  0.000719  0.000666  KWB  5,936.70  5,566.83  3.7441  43.2748  0.000676  0.000634  WLB  7,025.68  6,276.16  5.5708  42.8807  0.000468  0.000418  BEA  12,281.36  10,528.19  6.7010  40.6610  0.000266  0.000228  UB  2,944.08  2,500.69  6.2944  36.5811  0.000102  0.000087  194,916.05  176,888.00  3.6666  31.8227  0.000049  0.000044  HKB  EMPIRICAL FINDINGS Table VII. Annual deposit premiums for the year  A N D R E S U L T S / 46  1985.  Name  V  B  Sv  Se  d  g  WLB  7,661.68  6,810.46  5.7970  43.1729  0.000479  0.000426  HSB  67,195.81  54,652.80  5.6967  27.5150  0.000002  0.000002  BEA  15,573.85  13,600.49  3.8711  26.0629  0.000002  0.000002  HKB  238,230.84  219,978.00  2.3091  23.1589  0.000002  0.000002  E M P I R I C A L FINDINGS  Table  VIII.  Market  values  and book  values  of  A N D R E S U L T S / 47  individual  banks  (in  i HK$million). Name  1980  1981  1982  1983  1984  1985  -mv  6,366.80  10,664.80  9,948.31  11,673.61  12,281.36  15,573.85  -bv  5,481.39  7,454.62  9,278.58  10,994.29  11,354.20  14,514.61  -mv  109,092.79  133,942.58  152,517.66  178,348.62  194,916.05  238,230.84  -bv  104,279.00  135,538.00  163,516.00  194,285.00  206,363.00  252,815.00  -mv  30,028.50  39,051.60  40,429.25  52,073.65  56,978.25  67,195.81  -bv  17,555.00  23,520.60  37,316.50  46,683.80  49,917.90  58,378.30  -mv  4,656.13  6,648.66  5,841.72  6,346.36  7,025.68  7,661.68  -bv  3,470.16  4,403.41  5,499.07  6,147.89  6,804.48  7,386.90  H K I C -mv  -  2,164.38  2,483.19  2,638.59  2,737.61  -  -bv  1,306.36  1,935.12  2,297.09  2,593.75  2,828.56  --•  -mv  1,897.77  4,003.00  4,748.63  5,470.48  5,936.70  -bv  1,727.80  3,632.93  4,846.00  5,607.84  6,108.68  -mv  4,663.89  7,098.25  8,001.90  9,121.47  9,571.68  --  -bv  4,525.81  6,644.57  7,914.94  9,577.42  10,264.93  -  -mv  2,104.44  3,287.89  2,375.72  2,468.35  2,944.08  -  -bv  1,807.15  2,240.76  2,474.13  2,619.42  3,070.59  -  BEA  HKB  HSB  WLB  KWB  OTB  UB  .  -  E M P I R I C A L FINDINGS A N D R E S U L T S / 48 Table  IX.  Average  annual  premiums  and  prices  for guarantees  for the  period 1981-84.  Name  g  BEA  0.001870  0.001370  HSB  0.001143  0.000957  UB  0.001115  0.000780  HKIC  0.000906  0.000830  OTB  0.000727  0.000628  KWB  0.000471  0.000411  WLB  0.000447  0.000391  HKB  0.000022  0.000019  Average  premium for the non-failed group  Average  premium for the failed group  =  =  0.000871  0.000805  EMPIRICAL  FINDINGS A N D R E S U L T S  / 49  Table X. Average Sv for the period 1981-81.  Name  Sv  UB  13.9841  BEA  11.4274  HSB  10.1763  WLB  8.6429  OTB  7.3522  HKIC  6.5775  KWB  5.3868  HKB  3.1759  Average Sv for the non-failed group Average Sv for the failed group  =  =  8.3556  8.3252  Table XI. Debt-to-asset value ratio.  Name  1980  1981  1982  1983  1984  1985  BEA  0.8121  0.6624  0.8651  0.8775  0.8573  0.8733  HSB  0.5358  0.5517  0.8623  0.8388  0.8174  0.8133  HKB  0.7993  0.8513  0.9179  0.9335  0.9075  0.9234 .  WLB  0.6754  0.6034  0.8640  0.8918  0.8933  0.8889  UB  0.6850  0.5255  0.8040  0.8338  0.8494  KWB  0.8069  0.8093  0.9113  0.9281  0.9377  HKIC  --  0.7900  0.8449  0.8893  0.9412  0.9308  0.8277  0.7887  0.8714  0.9267  OTB  EMPIRICAL FINDINGS AND  RESULTS / 50  Table XII. Deposits (expressed as a percentage of total debt) of individual banks.  Name  1980  1981  1982  1983  1984  1985  BEA  66.05  65.43  82.18  83.96  90.82  92.37  HKB  83.47  90.74  93.82  93.45  94.14  90.87  HSB  95.21  83.07  93.86  92.49  98.83  99.22  WLB  87.65  89.24  83.26  88.90  91.11  92.20  HKIC  65.15  64.16  79.84  82.22  78.56  KWB  59.27  63.81  75.57  77.38  80.86  OTB  67.73  74.26  80.06  82.41  83.93  UB  50.44  69.47  81.00  78.73  82.78  EMPIRICAL FINDINGS AND Fig. I. Average  market values  (expressed  RESULTS / 51  in terms of percentage  book values) of the failed and non-failed groups.  of the  EMPIRICAL Fig.  II. M a r k e t  individual  values  (expressed  as  a  FINDINGS AND  percentage  RESULTS  of book  / 52  values) for  banks.  HUB  % 1*0 120  120  100  |eo «i  HI  g4-  g<T  SI  Si  n .  Ifeat  H  Jo  HS6 I4«  14-0  [26  loo  loLrS  ICO  12.0  Jt  Jfx  Si  H  St  t/w  Si  $2  Si  M  I2C  ( CO  Si  8z  (CO  . /•?  So  d!2  «£*  f4  So  0T6  %  I oo  It  H^-r  r^8  HMC  130 H  fa  0-6  EMPIRICAL FINDINGS AND  RESULTS / 5 3  Fig. III. Annual average premiums for the failed and the nonfailed groups.  4  o- oci.3 O.OCfi  o  OOi I  O.CDiO  0 oeeS o.cooj • o.tocC o.oooZ • 0 toc40. ooo5 o. oco £  o. coot O. 2i  —  footed,  Pjrwy  *4-  as  E M P I R I C A L FINDINGS  A N D RESULTS / 54  Fig. IV.Annual average Sv for the failed and non-failed group.  E M P I R I C A L FINDINGS A N D R E S U L T S / 5 5  Fig. V. Average debt-to-asset value ratio for the failed and non-failed groups.  E M P I R I C A L FINDINGS A N D R E S U L T S / F i g . V I . Market value, book value, total debt and deposits of B E A .  1ooo  (2.ceo  \o.coo  i.eco  4-.CCV 1  2.ooo i  0  —< S\  1 Sz  » Si  1 ft  rg$  >  EMPIRICAL  Fig. VII.  FINDINGS A N D  RESULTS  Market value, book value, total debt and deposits of HKB.  >4-0' coo -3.lo.ceO  SI  82  U  $q  s  5  /  E M P I R I C A L FINDINGS  AND RESULTS / 58  Fig. VIII. Market value, book value, total debt and deposits of HSB.  E M P I R I C A L FINDINGS A N D R E S U L T S / 5 9 F i g . IX. Market  value, book value, total debt and deposits of W L B .  EMPIRICAL X.  Market  FINDINGS A N D R E S U L T S  value, book value, total debt and deposits of  HKIC.  /  EMPIRICAL FINDINGS F i g . XI. Market  iioCO  -I  i. occ A  >.cco  A N D R E S U L T S / 61  value, book value, total debt and deposits of K W B .  E M P I R I C A L FINDINGS F i g . XII. M a r k e t  A N D R E S U L T S / 62  value, book value, total debt and deposits of O T B .  EMPIRICAL FINDINGS A N D RESULTS / 6 3 Fig.  XIII. Market value, book value, total debt a n d deposits of U B .  ftMM(i<  4,000  2.2CO 1  \r.->vO  n  a  H  CONCLUDING R E M A R K S In this paper, sector  in  I have  Hong Kong.  been presented. of  bank  and  for  on the  past  Hong Kong government's  liquidation,  and  Therefore, the  risk-adjusted  and  I  have  come  offers  many  the  the  failure  ultimate to  history  aim, i.e.  the  advantages when  banking has  also  prevention  conclusion  purposes,  of estimating  risk-adjusted  context of this  premiums  regulator  deposit  the feasibility  also  premium in  prices  monitoring  demonstrated  assets,  insurance  risk-adjusted risk.  brief description  and system of the  that  the  compared to  insurance.  of bank's  deposit  current structure  system of loan guarantee  Furthermore, I have value  A  Given the  collapse  hypothetical deposit  outlined the  can  be  price  for  simplified  regarded  as  insurance  if  the  or  government  the  hypothetical  loan guarantee model.  measures  in Hong Kong can make  even  the current market  use is  and  Actually, of  the  the  bank's  of these information  reluctant  system  of  to  introduce  loan  guarantee  assets is important for  regulatory  described in this paper.  Moreover,  the  purposes.  With  debt-to-asset adequacy,  current market this  value  the  value  "fair"  ratios  regulator  of bank's  market  for  value,  individual bank.  can  impose  the By  regulator setting  an  upper  limit  has  two  further  to  a the  can  assess  standard  on  the  capital  debt-to-asset  value  ratio.  The  model  mentioned  developed in  Section  in  this  VI. 2.  paper  First,  the  model  64  is  based  advantages on  besides  common  sense  those and  /  65  intuition. In the model, the risk of a bank is a function of both the debt-to-asset value  ratio,  and  the  risk  associated  relationships  are reasonable  Second,  model is robust in nature  the  modifications, premiums  for  the  model  banks  that  with  and can be easily  can do  be not  [see  returns.  Such  functional  understood.  Ronn and Verma,  extended have  their  to  estimate  publicly  traded  the  1986]. With "fair"  equity.  model can be applied to the whole banking industry for regulatory  some  risk-adjusted  Therefore, purposes.  the  / 66  REFERENCES 1.  Asiaweek, Asiaweek L t d . , Hong Kong.  2.  The Banking  Ordinance  1986, Hong Kong: Government  Publications  Centre,  Hong Kong, 1986. 3.  BLACK,  F.,  and  Scholes,  Liabilities." Journal 4.  CAMPBELL,  T.  of Political and  Environment." Journal 5.  COOPERS Courses,  6.  "The  Economy  Glenn,  D.  of Finance  LYBRAND,  Pricing  of  and  Corporate  81 (May/Jun 1973), 637-59.  "Deposit  Insurance  39 (Jul 1984),  HONG  Options  KONG.  in  a  Deregulated  775-87.  Course  Materials  for  Banking  1986.  FISCHER, Journal  7.  &  M.  S.  "Call  of Finance  Hong Kong  Option Pricing When 33 (Mar 1978),  the Exercise  Price  is  Uncertain."  169-76.  1986, Hong Kong: Government  Publications  Centre,  Hong Kong,  1986. 8.  Hong Kong Economic Report  9.  JENSEN,  M . C . and  Financial  10.  11.  Analysts  Meckling,  Journal  JONES,  E . P . and Mason,  Banking  and Finance  KANE, of  "Can  the  Corporation  Survive?"  1978).  S.P. "Valuation  4 (1980),  Services  W.H.  (Jan/Feb  E . J . "Technological  Financial  1986, Lloyds Bank P i c , London, 1986.  of Loan Guarantees."  Journal  of  89-107.  and Regulatory  Competition."  Forces  Journal  of  in the Developing  Fusion  Finance  (Jul  1984),  of  Banking  39  759-72. 12.  , and  13.  "Appearance  Finance  MARCUS,  and Reality  10 (Jun 1986), A . J . and Shaked,  in Deposit Insurance." Journal  175-88. I. "The Valuation  of FDIC  Deposit  Insurance  / 67 Using  (Nov 14.  Option-pricing  Estimates."  Journal  of Money,  Credit  MASON,  S.P. and Merton, R . C . "The Role of Contingent Finance."  Unpublished  working  paper,  Graduate School of Business Administration, Boston, MERTON,  of Finance  17.  ,  of Banking  "On the Cost  Costs." Journal RONN,  of Business  Pennsylvania  SMITH, (Jan/Mar  22.  The Risk  and Finance  1 (Jun 1977),  Insurance  When  There  Structure of  3-11.  Are Surveillance  51 (Jul 1978), 439-52.  of Finance  41 (Sep 1986), 871-95.  J . F . and Miles, J . A . "The Use of Warrants  Management  21.  University  E.I. and Verma, A . K . "Pricing Risk-Adjusted Deposit Insurance: A n  SINKEY, First  20.  Harvard  29 (May 1974), 449-70.  of Deposit  Option-Based Model." Journal 19.  Claims Analysis in  , "An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees." Journal  18.  16  M A . (1984).  R . C . "On. the Pricing of Corporate Debt:  Interest Rates." Journal 16.  Banking  1984), 446-60.  Corporate  15.  and  Bank:  (Autumn  A n Application  of  Pricing."  Financial  Option  Journal  of Financial  Economics  3  1976), 3-51. of Option Pricing Analysis."  in James  Handbook of Financial Economics  (1979), North Holland.  SHARPE,  Adequacy,  701-18.  Out of  1982), 27-32.  C.W. "Option Pricing: A Review."  , "Application  Values."  in the Bail  W . F . "Bank Journal  of  Capital  Financial  and  Deposit  Quantitative  L . Bicksler ed.  Insurance  Analysis  13  and Security (Nov  1978),  APPENDIX. WEEKLY CLOSING STOCK PRICES. Year 1980  BEA  HKB  HSB  KWB  UB  WLB  67.00  18.50  123.00  7.75  67.00  18.70  121.00  7.50  68.00  19.30  125.00  7.85  71.00  20.70  136.00  8.00  69.00  21.00  135.00  7.90  70.00  21.50  134.00  7.80  68.00  24.00  139.00  8.40  67.00  23.10  134.00  8.20  66.50  23.40  133.00  7.90  55.00  21.70  124.00  7.45  54.00  20.40  83.50  7.10  45.00  21.20  84.00  7.00  46.00  13.60  84.00  7.10  51.50  46.00  13.40  83.50  6.80  49.50  46.00  13.40  83.50  6.90  48.50  47.00  13.50  88.50  6.70  48.00  48.50  13.60  95.00  7.00  49.50  50.00  13.70  98.00  6.75  48.00  51.00  13.80  103.00  6.75  49.50  50.50  14.10  101.00  6.80  49.50  51.00  14.20  102.00  6.70  49.50  51.00  14.20  102.00  6.70  49.00  56.50  14.80  117.00  6.80  49.75  68  /  69  56.00  15.60  119.00  7.10  50.00  55.00  15.60  119.00  7.05  51.00  56.00  15.90  130.00  7.10  50.50  56.00  16.20  133.00  7.15  50.00  56.50  16.70  137.00  7.55  50.00  56.00  17.00  137.00  1.930  7.35  50.50  56.00  17.90  143.00  2.375  7.70  51.00  58.50  17.80  139.00  2.975  7.95  57.00  58.00  17.60  139.00  2.525  7.85  56.00  59.00  18.30  140.00  2.650  7.80  58.00  59.00  18.50  145.00  2.500  7.85  57.50  61.00  17.40  134.00  2.400  7.65  56.50  58.00  17.10  135.00  2.425  7.50  58.00  58.50  17.00  134.00  2.700  7.40  57.00  61.00  18.30  138.00  2.900  7.50  59.50  60.50  17.70  136.00  2.625  7.25  58.50  59.00  17.50  135.00  2.700  7.20  59.00  62.00  18.20  140.00  2.875  7.55  64.50  66.00  19.30  144.00  2.800  8.00  65.00  69.00  20.10  144.00  2.800  7.85  61.50  71.00  20.90  153.00  2.800  8.15  62.50  71.00  21.70  155.00  2.850  8.30  63.00  71.00  22.20  155.00  3.400  12.60  67.50  71.00  21.70  150.00  3.000  10.70  65.00  /  1981  70  68.00  20.50  145.00  2.925  10.20  64.00  69.00  19.80  144.00  2.800  9.40  72.50  66.00  17.90  132.00  2.350  8.35  68.00  66.00  18.90  136.00  2.650  8.30  72.50  69.00  21.60  149.00  2.900  9.50  79.50  73.00  23.10  163.00  3.275  11.10  87.00  79.00  23.50  171.00  3.150  11.70  89.50  80.00  23.10  172.00  3.100  11.50  90.00  80.00  22.20  168.00  3.050  11.50  92.00  97.00  22.80  169.00  3.075  11.60  93.50  102.00  23.10  176.00  3.275  12.30  99.00  99.00  22.50  170.00  3.500  11.70  95.00  107.00  21.90  167.00  3.700  11.30  90.00  111.00  21.80  168.00  3.700  11.00  89.00  111.00  21.10  164.00  3.450  9.80  87.00  70.00  19.70  163.00  3.500  9.20  86.50  76.00  16.30  116.00  3.750  9.80  85.00  84.00  16.40  117.00  3.950  9.80  85.50  42.00  16.30  117.00  3.775  9.70  83.00  42.00  15.30  114.00  3.725  9.45  82.00  41.50  14.90  115.00  3.300  7.35  79.50  41.50  15.00  116.00  3.150  7.70  82.00  41.50  14.90  118.00  3.100  7.70  83.00  41.50  14.90  117.00  3.075  7.50  83.00  /  50.00  15.80  122.00  3.000  64.50  15.90  122.00  63.00  16.70  62.00  .  71  7.85  87.00  3.200  8.05  95.00  128.00  3.350  9.35  110.00  16.90  129.00  3.700  11.00  114.00  91.00  17.50  136.00  4.900  12.60  121.00  77.00  16.60  133.00  4.950  12.60  128.00  77.00  16.70  134.00  4.600  12.20  127.00  74.00  16.80  145.00  4.400  12.70  125.00  81.50  17.10  149.00  4.600  13.60  127.00  78.00  17.40  147.00  4.750  14.20  125.00  74.50  16.50  140.00  4.450  13.50  114.00  76.00  17.10  142.00  4.425  14.50  113.00  77.00  16.80  140.00  4.550  16.40  114.00  75.50  16.70  141.00  4.400  16.30  113.00  76.00  16.90  141.00  4.400  18.10  110.00  73.00  16.60  138.00  4.350  20.40  110.00  71.00  15.90  134.00  4.050  19.80  96.00  68.00  15.20  129.00  4.200  21.50  101.00  63.00  15.10  127.00  4.350  18.00  98.00  52.00  14.20  117.00  4.000  15.20  92.00  47.00  13.40  108.00  3.500  13.00  82.00  55.00  14.00  110.00  3.600  13.80  86.00  54.50  13.70  110.00  3.600  13.80  86.00  53.00  13.80  109.00  3.400  13.20  85.00  /  72  64.00  14.10  113.00  3.575  13.20  89.00  67.00  14.60  118.00  4.050  14.90  96.00  69.00  14.90  126.00  3.975  13.90  104.00  67.00  14.70  125.00  3.700  13.30  110.00  67.00  15.00  128.00  3.700  13.60  107.00  65.50  14.70  127.00  3.650  13.70  108.00  67.00  14.70  128.00  3.650  16.70  117.00  64.00  14.20  122.00  3.425  16.60  111.00  66.00  14.30  124.00  3.450.  16.10  114.00  60.00  14.60  125.00  3.450  16.50  114.00  68.50  14.60  127.00  3.650  16.50  117.00  67.50  14.80  126.00  3.600  15.80  115.00  65.00  15.00  129.00  3.525  15.60  114.00  66.00  15.10  129.00  3.600  15.50  118.00  62.50  14.80  125.00  3.550  14.20  119.00  61.00  14.40  119.00  3.500  12.70  111.00  61.00  14.60  120.00  3.500  12.80  113.00  60.00  14.70  120.00  3.500  12.90  113.00  42.75  14.10  110.00  3.300  10.40  105.00  43.75  14.70  115.00  3.400  12.00  104.00  42.50  14.60  116.00  3.450  12.00  87.50  41.50  14.70  92.00  3.450  11.00  83.00  37.75  14.80  89.50  3.425  10.90  80.00  37.75  14.90  90.50  3.250  10.60  80.00  /  73  39.00  10.80  89.00  2.750  10.80  80.00  38.25  11.30  89.00  2.900  11.20  79.50  40.75  11.60  91.50  3.100  13.30  84.00  43.00  12.10  93.00  3.150  13.10  84.00  43.00  11.80  91.50  3.100  12.60  85.00  42.00  11.60  90.50  3.050  12.50  83.50  43.50  11.80  91.50  3.025  12.60  83.50  42.50  11.60  90.50  2.950  12.50  81.00  41.50  11.50  89.50  2.900  11.70  80.00  40.25  11.30  89.00  -2.825  11.40  76.50  40.00  11.20  88.00  2.850  11.20  73.50  39.75  11.20  87.50  2.800  11.10  73.50  39.50  11.10  85.50  2.750  11.00  74.50  39.75  11.20  86.50  2.800  11.80  78.00  41.50  10.90  82.50  2.700  11.40  76.50  38.25  10.40  76.50  2.500  10.70  68.00  37.50  10.10  72.50  2.450  10.90  67.50  30.00  9.05  62.50  2.350  9.00  53.00  30.00  9.40  62.50  2.300  10.00  54.00  29.60  9.70  62.00  2.350  10.02  54.00  31.60  9.85  63.00  2.400  10.00  55.50  31.00  9.75  63.50  2.350  9.70  59.50  31.00  9.85  63.00  2.350  9.60  61.00  31.00  9.90  64.00  2.300  10.00  59.50  /  1983  74  24.60  8.15  46.00  2.100  8.00  46.00  24.00  8.60  44.00  1.950  8.00  42.00  22.50  8.65  41.75  1.900  8.05  38.50  20.80  8.25  39.00  1.800  7.80  37.50  18.50  8.00  35.00  1.800  7.00  34.50  22.50  8.55  42.50  1.820  6.80  37.00  22.00  8.60  41.25  1.950  6.80  36.50  20.70  8.25  39.25  1.850  5.90  34.00  18.00  7.85  35.25  1.870  5.50  32.50  17.40  7.25  31.75  1.530  4.63  29.50  19.40  7.50  34.00  1.600  4.90  31.00  19.70  7.45  34.00  1.600  5.10  30.75  19.30  7.50  34.25  1.630  5.05  30.00  20.00  7.70  35.75  1.600  5.30  32.00  20.60  7.85  37.75  1.640  5.45  32.75  25.10  8.35  45.50  1.900  5.90  38.00  25.10  8.25  46.75  1.850  5.90  37.25  26.60  8.40  49.75  1.880  6.15  39.00  26.80  8.35  50.00  1.880  6.10  39.50  27.50  8.55  51.50  2.050  6.65  45.50  32.00  9.05  56.00  2.175  7.15  50.00  35.00  9.50  59.50  2.125  7.60  54.50  33.75  9.00  59.50  1.910  7.10  49.00  31.50  9.20  63.50  1.920  7.40  47.25  /  75  29.90  9.00  63.00  1.880  7.05  46.75  32.50  9.00  42.75  1.800  7.10  47.00  32.50  9.10  43.00  1.840  7.10  43.50  32.75  9.25  46.25  2.050  7.35  50.50  32.25  8.75  48.50  2.100  7.35  50.00  29.80  8.15  44.25  1.850  7.70  46.50  30.25  8.30  44.00  1.830  7.60  46.00  29.80  8.20  42.00  1.760  7.25  45.50  27.60  7.95  41.75  1.700  6.80  44.50  27.50  8.05  40.75  1.650  6.75  43.75  26.00  7.95  40.00  1.580  6.45  40.50  27.00  7.85  40.50  1.610  6.70  42.50  25.60  7.80  39.25  1.570  6.40  40.50  28.30  8.20  42.25  1.650  6.80  44.00  29.30  7.95  42.00  1.680  6.50  42.00  29.50  8.15  42.50  1.720  7.00  43.50  30.25  8.40  45.00  1.800  7.15  44.00  32.00  8.40  49.00  1.800  7.60  47.00  33.00  8.35  51.00  1.910  7.70  48.00  29.60  8.15  49.50  1.950  7.55  47.00  27.50  7.95  48.75  1.840  " 7.10  44.25  27.60  7.90  48.50  1.860  7.05  44.00  26.50  7.75  46.00  1.780  7.00  42.00  26.00  7.80  43.75  1.800  7.00  40.50  /  1984  76  27.20  7.75  42.00  1.750  6.70  39.75  26.40  7.55  40.50  1.630  6.50  26.50  7.30  40.00  1.600  6.30  35.00  21.00  6.90  31.75  1.450  4.70  30.25  18.30  6.90  32.50  1.360  4.15  28.10  16.80  6.65  30.00  1.370  4.15  26.20  15.90  6.70  30.25  1.340  4.00  26.00  17.50  6.95  34.25  1.370  4.05  28.00  18.50  7.00  35.75  1.320  4.40  28.00  19.80  7.25  38.50  1.450  4.70  29.50  19.80  7.10  36.25  1.400  4.70  30.00  20.10  7.10  37.00  1.400  4.90  29.80  19.90  6.85  36.00  1.360  4.40  27.30  19.00  7.00  37.00  1.370  4.60  28.00  19.00  7.00  36.75  1.370  4.60  29.10  19.40  6.95  37.00  1.350  4.70  28.50  19.20  7.00  37.75  1.370  4.70  28.70  19.70  7.00  37.75  1.430  4.75  28.80  20.50  7.15  39.25  1.450  5.35  30.50  21.40  7.85  43.25  1.450  5.70  35.00  23.30  8.60  45.50  1.520  6.05  36.50  22.50  8.55  44.75  1.520  6.20  35.50  22.50  8.75  45.50  1.560  6.35  36.50  24.20  8.45  44.25  1.480  6.20  35.50  '  36.50  /  77  28.60  8.75  44.75  1.600  6.10  35.75  28.30  8.75  43.50  1.580  5.95  35.50  29.40  8.80  44.00  1.580  6.05  35.50  29.30  9.00  45.75  1.580  6.15  35.25  28.80  9.45  45.25  1.610  6.30  36.00  26.70  9.60  47.00  1.710  6.45  37.75  23.30  8.75  36.00  1.430  5.40  32.75  25.00  9.20  39.00  1.590  5.50  31.25  24.60  7.30  39.00  1.600  5.30  31.25  25.70  7.40  41.50  1.610  5.50  33.00  24.00  7.10  38.50  1.560  5.10  30.00  23.20  6.85  37.50  1.460  4.90  28.80  21.00  6.25  35.50  1.360  4.70  27.70  20.02  6.20  34.50  1.270  4.65  27.00  20.09  6.20  33.75  1.310  4.60  27.10  21.70  6.15  33.75  1.290  4.73  27.50  22.70  6.35  35.50  1.330  5.00  28.30  22.30  6.25  35.00  1.300  4.65  27.60  22.00  6.20  34.00  1.300  4.58  27.60  21.00  6.05  33.00  1.290  4.45  26.60  18.20  5.75  30.25  1.200  4.00  24.20  18.10  5.30  25.90  1.120  3.90  21.00  19.10  5.50  27.90  1.160  4.20  22.40  19.20  5.45  27.30  1.120  4.00  21.70  /  1985  78  19.80  6.45  32.00  1.230  4.50  24.00  20.90  6.45  33.75  1.240  4.40  25.60  20.10  6.35  32.75  1.250  4.40  23.40  19.70  6.20  31.50  1.230  4.20  23.00  19.80  6.40  32.00  1.260  4.10  24.20  20.10  6.30  33.00  1.270  4.30  25.50  20.10  6.30  33.00  1.290  4.35  25.60  21.10  6.75  35.00  1.310  4.50  26.00  20.80  6.85  35.75  1.310  4.50  25.90  20.00  6.60  34.75  1.250  4.40  24.70  19.60  6.65  35.00  1.230  4.30  23.90  20.40  6.75  36.25  1.260  4.25  25.00  21.10  6.80  38.00  1.250  4.50  26.20  20.80  6.65  36.25  1.200  4.40  25.20  21.60  6.65  37.75  1.250  4.45  25.30  21.70  6.80  38.50  1.240  4.43  26.30  22.00  7.05  39.75  1.270  4.60  28.20  22.90  7.40  41.00  1.310  4.80  28.50  22.70  7.40  41.00  1.290  4.95  28.10  22.80  7.50  41.00  1.300  5.10  28.60  22.90  7.80  42.75  1.370  5.20  30.75  23.50  7.85  41.75  1.400  5.20  31.50  24.80  8.60  46.00  34.50  25.50  9.25  47.75  35.00  /  79  24.70  9.05  48.50  34.00  24.30  9.05  47.00  33.50  24.50  8.90  46.25  33.00  24.40  8.70  46.25  31.50  24.70  8.95  47.25  33.25  24.80  9.00  47.25  33.00  24.80  8.85  47.25  32.75  22.80  8.80  47.00  32.00  22.10  8.35  46.50  33.00  22.40  8.40  47.00  32.75  21.80  8.50  47.50  32.50  22.70  8.95  49.00  35.50  23.30  9.10  44.50  34.75  23.00  8.00  44.50  34.50  24.20  8.00  45.50  37.50  24.30  7.95  46.25  38.50  25.40  8.35  50.00  46.75  27.90  8.35  54.00  46.25  27.00  8.15  51.00  48.75  26.30  8.10  53.00  45.00  24.00  7.80  48.00  40.00  22.00  7.30  44.00  33.25  24.10  7.85  47.50  38.75  24.40  7.70  47.00  38.50  /  80  23.50  7.60  46.50  35.00  23.60  7.70  47.75  37.00  23.00  7.65  46.25  35.75  23.50  7.70  47.25  36.25  23.10  7.90  47.50  36.00  23.00  7.75  46.25  35.50  22.80  7.75  46.75  36.00  22.60  7.70  45.75  35.50  22.80  7.75  46.00  35.50  22.70  7.40  44.00  34.50  22.50  7.35  43.50  35.00  21.30  7.20  42.00  33.75  20.40  6.80  40.50  31.50  21.60  7.15  42.25  32.50  21.50  7.00  41.75  32.50  21.80  7.10  42.50  32.50  23.00  7.50  46.25  35.50  22.70  7.40  45.00  34.50  22.70  7.70  46.00  34.75  23.70  7.75  46.25  35.50  23.50  7.70  46.75  36.00  23.90  7.75  47.00  36.00  23.70  7.65  46.25  36.25  23.70  7.60  46.50  35.50  /  1979/80  81  24.40  7.55  45.00  35.50  24.50  7.55  45.50  35.50  HKIC  OTB 3.150 3.150 3.250 3.300 3.500 3.400 3.425 3.375 3.175 3.175 3.400 3.575 4.000 3.975 4.500 3.650 4.000 3.800 3.950  3.800 3.750 3.650 3.800 3.925 3.950 4.300 4.300 4.250 4.550 5.250 5.350 5.900 5.350 5.550 4.400 4.350 3.950 4.050 4.150 4.150 4.050 4.050 4.650  4.350 4.225 4.300 4.300 4.350 4.275 4.575 4.550 4.500 4.575  1980/81  4.775 4.925 5.600 6.000 6.550 6.150 6.500 7.050 7.000 6.450 6.400 7.000 6.850 6.660  7.400 7.350 7.350 7.200 7.200 8.100 5.100  7.300  4.600  6.600  4.100  6.100  3.800  4.750  3.700  5.000  4.075  6.050  4.400  6.500  4.250  6.750  4.100  6.700  4.025  6.250  4.075  6.500  4.300  6.800  4.400  7.100  4.050  6.800  4.000  6.850  3.850  5.350  3.700  5.300  3.925  5.650  3.950  5.850  4.200  5.900  4.200  5.800  4.150  5.750  4.200  5.900  4.725  6.350  4.500  6.450  4.800  1981/82  *  6.750  5.200  6.150  5.100  6.100  5.100  6.250  5.600  6.350  5.600  6.200  5.850  6.350  5.750  6.550  5.850  7.300  5.850  7.450  5.450  7.350  5.550  7.650  5.600  7.350  5.550  7.200  5.450  7.000  5.300  6.800  5.550  6.350  5.400  5.950  5.350  6.000  4.700  5.450  4.000  4.900  4.000  5.000  4.200  5.000  3.850  4.900  4.000  5.050  4.500  5.600  4.650  5.550  4.775  5.600  5.100  5.700  5.450  5.700  5.550  5.800  5.300  5.300  5.550  5.750  5.500  5.700  5.650  5.900  5.650  5.950  5.600  5.850  5.700  5.900  5.500  5.800  4.850  5.400  5.200  5.350  1982/83  5.000  5.200  4.325  4.850  4.750  4.900  4.850  5.150  4.875  5.100  5.000  5.000  5.000  5.200  5.100  5.450  5.150  5.650  5.600  5.950  5.600  6.300  5.500  6.050  5.550  6.000  5.550  6.200  5.450  6.000  5.450  5.850  5.250  5.700  5.150  5.550  5.350  5.450  5.000  5.350  5.450  5.550  5.350  5.750  5.200  5.250  4.950  5.250  4.025  4.350  4.300  4.400  4.300  4.450  4.475  4.650  4.550  4.475  4.700  4.650  4.500  4.625  3.625  3.900  4.000  4.000  3.850  4.150  3.650  3.950  3.450  3.650  3.450  3.950  3.500  3.750  3.300  3.425  3.200  3.000  2.800  2.875  2.850  3.000  2.800  3.025  3.000  3.100  3.025  3.500  3.100  3.500  3.450  3.975  3.550  3.850  1983/84  3.700  4.100  4.000  4.125  4.350  4.525  4.500  4.600  4.750  5.050  3.925  4.550  4.050  4.500  3.600  4.100  3.400  4.150  3.500  4.225  3.800  4.500  3.900  4.650  3.600  4.475  3.600  4.500  3.500  4.400  3.550  4.450  3.475  4.325  3.400  4.250  3.350  4.175  3.200  4.100  3.450  4.225  3.450  4.125  3.400  4.175  3.850  4.400  /  3.900  4.475  3.925  4.475  3.900  4.325  3.725  4.075  3.700  4.100  3.300  3.900  3.425  3.800  3.350  3.700  3.025  3.625  3.000  3.600  2.600  3.050  2.050  2.600  2.075  2.725  2.100  2.725  2.250  2.650  2.300  2.650  2.400  2.950  2.250  2.825  2.275  2.950  2.100  2.750  2.150  2.725  2.025  2.700  2.000  2.725  1.980  2.750  90  2.025  2.825  2.200  2.975  2.400  3.150  2.350  3.400  2.650  3.375  3.000  3.750  2.650  3.425  2.800  3.600  2.750  3.500  2.825  3.500  2.900  3.525  2.875  3.550  3.075  3.925  2.550  3.400  2.800  3.425  2.700  3.500  2.800  3.525  2.650  3.400  2.600  3.250  2.400  2.950  2.350  2.900  2.250  2.725  2.500  2.900  2.550  3.050  2.400  2.875  2.350  2.900  2.225  2.775  

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