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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 O F THE CURRENT MARKET VALUE O F BANKS A N D THE PRICING O F RISK-ADJUSTED DEPOSIT INSURANCE A N D L O A N GUARANTEE IN A N OPTION-PRICING CONTEXT: THE CASE O F H O N G K O N G by LAU, Y A M SHING A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DECREE OF MASTER OF SCIENCE (BUSINESS ADMINISTRATION) in THE FACULTY OF GRADUATE STUDIES Faculty of Commerce and Business Administration W e accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA 13 April 1987 © LAU, Yam Shing, 1987 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 for evaluating the solvency of banks and for empirically estimating the prices of government guarantees on loans made by banks and deposit insurance premiums, from the failure history of Hong Kong. The approach used exploits the isomorphic correspondence between loan guarantees and common stock put options. Though limited by the data set of publicly available information, this study is successful in identifying problem banks, and more specifically in evaluating the solvency of banks. Therefore, the model is useful in the early-warning aspect. Moreover, if the information set can be expanded to include those information available to the regulator, the result of this study can be improved. ii T A B L E O F C O N T E N T S Abstract ii Acknowledgement vi Dedication vii I. INTRODUCTION 1 II. PREVIOUS R E S E A R C H 5 III. B A C K G R O U N D 9 IV. DEPOSIT I N S U R A N C E A N D G O V E R N M E N T G U A R A N T E E 16 1. Effectiveness in Protecting Depositors 19 2. Transactions Costs in Case of Bank Failure 19 3. Subsidies to Shareholders and Economic Efficiency 20 V. S T R U C T U R E OF 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 23 1. Classification of Assets 23 2. Classification of Liabilities 25 VI. T H E M O D E L 27 1. The Current Asset Value of Banks and Their Variance 27 2. Price of the Government Guarantee on Advances 31 3. Deposit Insurance Premium 33 VII. D A T A : 35 VIII. EMPIRICAL 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 1980 43 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 1983 45 Table VI. Annual deposit premiums for the year 1984 45 Table VII. Annual deposit premiums for the year 1985 46 Table VIII. Market values and book values of individual banks 47 Table IX. Average annual premiums and prices of guarantees for the period 1981-84 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 i v List of Figures Fig. I. Average market values of the failed and non-failed groups 51 Fig. III. Annual average premiums for the failed and the non-failed groups. ... 53 Fig. IV. Annual average Sv for the failed and non-failed groups 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 HSB 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 HKIC 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 OTB 62 Fig. XIII. Market value, book value, total debt and deposits of U B 63 v ACKNOWLEDGEMENT I would like to thank my advisers - Prof. Maurice Levi, Prof. David Nickerson, Prof. Ed Nosal, and Prof. Josef Zechner - who provided input at various stages. A special thanks goes to Prof. Ronald Giammarino, the Chairman of my Thesis Committee, who gave me invaluable advice and constant support. I am also indebted to Prof. Eduardo Schwartz. Without his intellectual inspiration from the advance corporate Finance course, this paper would not exist. Furthermore, I have to acknowledge my indebtedness to the following individuals for the inclusion of their ideas in my paper: F. Black, E . J . Kane, R.C. Merton, E.I. Ronn, M . Scholes, C.W. Smith and, W.F. Sharpe. vi DEDICATION m y t e a c h e r s , f r i e n d s a n d m y f a m i l y . v i i I. INTRODUCTION In this study, I evaluate the solvency of various banks in Hong Kong through the use of stock market and financial data for the period 1980-85. The evaluation employs a methodology for arriving at empirical estimates of prices for government loan guarantees and of deposit insurance premiums, by using isomorphic correspondence between a loan guarantee and a put option. In the course of the evaluations, the market value of individual bank's assets is also estimated by exploiting the isomorphic relationship between equity and a call option. The estimation of market values is crucial because bank's assets are not traded in any secondary market and, hence, their market values cannot be readily observed for regulatory purposes. The bank failure history of Hong Kong is of particular interest because Hong Kong, the third largest financial centre in the world, has a financial system and structure completely different from other major financial centres. A central bank and deposit insurance are absent, and minimal supervision and control is exercised over the banking industry. This relative freedom has induced a large number of international banks to set up their South East Asian headquarters in Hong Kong. There are over 143 licensed banks operating in Hong Kong, but only eight of them, all based in Hong Kong, are listed on the local stock exchange. During the period from May 1985 to June 1986, four of the eight listed banks and also some other non-listed banks failed. These failure cases have alarmed 1 INTRODUCTION / 2 the general public by illustrating the shortcomings of the existing regulatory system. In order to prevent bank runs and panic during a financial crisis, the Hong Kong government has intervened in each of these case. As a result, most of the distressed banks were acquired by some other financial institutions which provide new capital. Such acquisitions took place smoothly because the government offered a "free of charge" guarantee on loans made by 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 are used interchangably.) In some cases, the banks were taken over by the government. In the course of regulatory reform, the government set up new rules and new standards to prevent future bank failure. In spite of the efforts made by the government, I argue that the new standards are economically inappropriate because regulator's information systems and concepts of insolvency are not economically consistent. Rather than focusing on the market value of an institution's net assets, legal insolvency turns on an institution's effective liquidity and authorities monitor accounting concepts of net worth calculated principally in terms of book values. In actual cases, insolvency and banking problems are reflected in the market value of the bank's assets. The book values of those assets, i.e., the historical costs, can only be taken as approximations to "true" market values. With legal and supervisory tests misfocused, an institution may be insolvent de facto for a long time without ever becoming legally insolvent. Moreover, as revealed by empirical evidence (see section VIII), 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 of assessing insolvency based on book value does not give meaningful results. On the other hand, the existing regulatory system may give rise to adverse managerial incentives. Since there is no appropriate pricing system and theoretically sound risk-assessing measure to eliminate adverse managerial incentives, managers may take excessive risk and the problems of moral hazard and adverse selection may arise. Alternatively speaking, under the existing system, institutions' behaviour may be distorted. Some suggestions on this issue are briefly outlined in section IV. The purposes of this study are three-fold. First, I employ a technique for estimating the market value of the bank's assets. The rationale is that only if the "fair" market value of the bank's assets can be found will various standards, such as capital adequacy, show meaningful results for monitoring purposes. This is a nontrivial problem because of the large number of non-traded assets on which market value is not available. Moreover, if I can successfully use annual data to estimate the market value, then it is viable for the regulator to use confidential monthly data supplied by all banks to estimate the market values of the banks for regulatory purposes. Second, I attempt to examine the relative suitability of deposit insurance and loan guarantees provided to banks, under the special economic and political environment of Hong Kong. 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 section, previous work in this area is discussed. In section III, the background of the banking system in Hong Kong and the recent failure cases are outlined. A comparison between the deposit insurance system and the government loan guarantee system is made in section IV. In section V, the structure of a typical bank's balance sheet in Hong Kong is presented. The model for estimating the current asset value of banks, and the models used to calculate the risk-adjusted price of the government guarantee on loans and risk-adjusted deposit insurance premium are developed in section VI. Section VII is a brief outline of the data set for the empirical studies. Empirical findings and results are presented in section VIII, followed by concluding remarks. II. P R E V I O U S R E S E A R C H Merton [1977] is one of the pioneers in applying the option pricing model to the pricing of deposit insurance. His model has its foundation on the isomorphic relationship between deposit insurance and common stock put options. Deposit insurance changes the nature of risky debt into a riskless obligation. The value of this insurance is the value of a put option on the assets of the bank. Thus, "fair" deposit insurance exacts the value of the put via the insurance premium. The model is designed to arrive at a point estimate of the value of this limited-liability put and to conclude the appropriate deposit premium from the value of the put. Further, Merton's model [1978] for evaluating the cost of deposit insurance explicitly takes into account surveillance or auditing costs and provides for random auditing times. The method used to derive this valuation formula again exploits the isomorphic correspondence between loan guarantees and common stock put options. By assuming a frictionless market, he finds that the equilibrium spread between the market interest rate and total rate of return on deposits is equal to the expected auditing costs per deposit per unit of time. He then comes to the conclusion that the auditing cost component of the deposit insurance premium is, in effect, borne by the depositors, and the put option component is borne by the equity holders of the bank. A more intuitive reason for this conclusion is that rational investors only pay for the costs which are solely incurred in the course of protecting their own benefits. Following Merton's approach [1977], Marcus and Shaked [1984] (henceforth MS) 5 PREVIOUS R E S E A R C H / 6 calculate bank-specific estimates of the proper premium for deposit insurance from a sample of 40 observations in the United States. They present empirical evidence of substantial overpricing on the part of the FDIC. In other words, MS find that the estimates of the appropriate risk-adjusted insurance premiums are lower than the premiums that banks are currently paying to FDIC. MS focus on the question of whether or not the existing flat premium is fair, but, in the process, overlook the effect of various aids, such as Direct Assistance and Purchase and Assumption, to distressed banks offered by FDIC. The exclusion of these assistance measures would understate the cost of deposit insurance, and consequently lead to the conclusion of FDIC premium overpricing. MS assume that the underlying security for the put option is the pre-insurance value of assets. In this connection, they have to make up an equation relating the pre-insurance and the post-insurance value of the assets. In postulating such an equation, they argue that insurance is a one-period renegotiable contract and that all of the increment on account of the purchase of insurance accrues to the value of the bank. But if deposits are covered by deposit insurance, bank interest rates are lower than what they should be in the absence of deposit insurance simply because deposits are risk-free. In other words, the costs of fund are lower. Holding the risk factor of the bank's assets constant, the value of the bank increases. Moreover, the presence of insurance increases competition in the industry. Competition may result in transfer of some or all of the increases in value from the bank to its customers. Hence there may be a reduction in value due to competition. MS overlook these issues in their .argument. PREVIOUS R E S E A R C H / 7 Also, in arriving at the pre-insurance value of the assets, MS assume that the market value of the debt is equal to its face value. In other words, they treat debt to be riskless. The pre- and post-insurance values of the assets are, therefore, overstated, and so the value of the limited-liability put is understated. This may partly account for their low estimates of the deposit insurance premium. Another attempt, following a similar line of argument, has been made by Ronn and Verma [1986] (henceforth RV). They too, follow Merton's approach, but they overcome the shortfalls of MS. They demonstrate the feasibility of estimating risk-adjusted premiums with the market data on equity value. Their approach yields a rank ordering of the banks on the basis of their risk to the insuring agencies. Alternatively, the model may be viewed as yielding an allocation rule for apportioning a given premium across the banking sector. In sum, they emphasize that the option-based approach lends itself more readily to cross-sectional comparisons of risk across banks, because the approach is based on the estimates of individual banks' riskiness as assessed by the market. Contrary to MS, RV point out that it is the future stochastic behaviour of the assets, and therefore the post-insurance value of the assets, that impinges upon the price of the insurance. Accordingly, they do not have to make assumptions about how the values of the assets before and after insurance are related. The model that I am going to develop in section VII closely follows Merton's model and the model of Ronn and Verma. Minor modifications will be made in P R E V I O U S R E S E A R C H / 8 order to fit the situation in Hong Kong and the data set. M y model will also cover the pricing of government guarantees on advances made by the banks. III. B A C K G R O U N D Following the philosophy of active non-interventionism and laissez-faire policy, there has been minimal government supervision in the banking industry in Hong Kong prior to 1986. The presumption of the regulator was that bankers would behave in good faith. It is under such ideology and presumption that the banking system of Hong Kong evolved to its current state. Unlike most major economies, Hong Kong has no central bank. The Monetary Affairs Branch of the Government Secretariat carries out central bank duties whenever necessary through the Hong Kong Government Exchange Fund and the privately owned Hong Kong & Shanghai Banking Corporation (henceforth Hong Kong Bank). The deposit-taking sector in Hong Kong, has been under a three-tier structure since 1981. Under this system, there are three distinct classes of institutions: licensed banks, licensed deposit-taking companies and registered deposit-taking companies. In addition, there are representative offices of foreign banks. At the end of 1985, there were 143 licensed banks (35 of them being locally incorporated) maintaining a total of 1,394 offices in Hong Kong. Licensed banks may operate all types of banking business. All licensed banks are required to be members of the privately run Hong Kong Association of Banks. The Association was established in January 1981 to monitor banking standards and regulate charges. Moreover, the Association sets the maximum rates payable on bank deposits of original maturities up to 15 months less a day. But deposits of 9 B A C K G R O U N D / 10 HK$500,000 or above for less than three months term to maturity are not restricted by the ceiling rate. Banks may compete freely for these deposits. Licensed deposit-taking companies are usually merchant banks or investment banks. They may also take deposits of any maturity from the public, but in amounts of not less than HK$500,000. No ceiling is set on the interest rates that they may offer. At year end, 1985, there were 35 licensed deposit-taking companies. Registered deposit-taking companies are restricted to taking deposits of HK$100,000 or more with an original term to maturity of at least three months. At the end of 1985, there were 278 registered deposit-taking companies. As provided for by the Banking and Deposit-taking Companies Ordinances and as appointed by the Governor, The Commissioner of Banking, who is also the Commissioner of Deposit-taking Companies, is the authority for the prudential supervision of all deposit-taking institutions. The international division of the Commissioner's office obtains monthly returns from, and sends examination teams to the overseas branches of Hong Kong incorporated banks and deposit-taking companies. The principles of the revised Concordat issued by the Committee on Banking Regulations and Supervisory Practices (which meets regularly at Basle in Switzerland), and the principles of world-wide supervision of banking groups based in Hong Kong are accepted and practised. The Hong Kong Bank, which issues around 80 per cent of the notes in B A C K G R O U N D / 11 circulation (the other 20% is issued by the Standard Chartered Bank), also performs some of the functions of a central bank and thereby is recognised as the de facto central bank. It is the banker of the government and, sometimes, the lender of last resort. However it should be noted that the bank does not necessarily take on the role of the lender of last resort. As it is a privately owned corporation, it has to consider its own benefit and commercial viability first before lending a helping hand. This is evident in the case of Hang Seng Bank in 1966. At that time, Hang Seng Bank was a well-established and well organised bank owned by local Chinese merchants. It was also recognised as the strongest business rival of the Hong Kong Bank. In 1966, Hang Seng Bank was suffering from a bank run caused by rumours. The huge cash reserves of the bank could not meet the continuous withdrawal of deposits. So Hang Seng Bank turned to the Hong Kong Bank for financial support. Through negotiation, the major shareholders of Hang Seng Bank sold their controlling interest to the Hong Kong Bank. In exchange, the Hong Kong Bank agreed to support the distressed bank. Therefore, the Hong Kong Bank was successful in establishing the largest deposit base and reducing competition by acquiring Hang Seng Bank. It was also successful 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 either acquired by other banks (e.g. Hang Seng Bank in 1966) or liquidated (e.g. Ming Tak Bank in 1966). On September B A C K G R O U N D / 12 27, 1983, a medium-sized non-listed bank controlled by some overseas Chinese, the Hang Lung Bank, was in distress due to huge fraud-related loan losses. Its close business partner, the Standard Chartered Bank, not only stopped granting any further credit, but also demanded covering for the 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 was an increase in public concern about the political future of Hong Kong, as Britain and China began negotiation on the 1997 issue. The crisis of Hang Lung Bank intensified the confidence problem of the Hong Kong people. In order to restore stability in the financial market, the government was forced to intervene. The troubled bank was wholly taken over by the government, and Secretary of Monetary Affairs, Douglas Blye, was appointed as the bank's new chairman. Normal business of the bank was then resumed. After the Hang Lung incidence, many scholars in Hong Kong advocated the setting up of deposit insurance to protect the interest of the depositors. But the government, as well as the largest banks (both local and foreign) did not accept the suggestion. One of the arguments against insurance was that the cost of setting up deposit insurance was huge and the chance of failure for the well-managed large banks was extremely small. It was therefore not economical to set up deposit insurance. Another major argument as expressed by the Hong Kong Bank was that it was not fair to force the majority of relatively safe and well-managed banks to subsidize the few high-risk banks. B A C K G R O U N D / 13 While the debate on the issue of deposit insurance began to cool down in 1985, the Overseas Trust Bank enter financial distress as it had incurred a cumulated loss later estimated to be over HK$3 billion which had not been revealed in the previous audit. Once again, the government took over the bank as well as its principal subsidiary, the Hong Kong Industrial and Commercial Bank on June 7, 1985. As both banks were listed banks, the event caused a serious disruption in the stock market, and stock trading of the two banks had to be stopped. Months later, the Hong Kong Industrial & Commercial Bank was considered financially healthy and stock trading resumed. But the stock price showed a substantial drop (from $3.80 to $0.91) which was partly attributable to the capital losses from the shareholdings in its parent company, the Overseas Trust Bank. The major cause of the collapse of Overseas Trust Bank was commercial fraud. Four former senior officials have been charged with conspiracy to defraud or alleged criminal irregularities involving the granting of massive dubious loans. As the loss of the bank was huge, the government had to pump around HK$2 billion into the bank as new capital. Previous shares became worthless thereafter. In late 1985, K a Wah Bank which was owned by the Law family of Singapore, reportedly had its capital and reserves of about HK$550 million wiped out by bad loans. The bank has been a heavy lender to Malaysian-controlled companies, especially those companies linked with tycoon-politician Tan Koon Swan. While Tan's Singapore-based Pan Electric Industries collapsed, the bank faced a huge number of bad and doubtful loan accounts. Subsequently on April 21, 1986, K a Wah was acquired by another financial institution, China International Trust & Investment Corporation (henceforth CITIC), of the People's Republic of China. B A C K G R O U N D / 14 CITIC's buyout, the first time that China has moved in directly to take control of a troubled Hong Kong financial institutions, has been hailed as a demonstration of China's determination to protect the stability of the banking system of Hong Kong. In the buyout, the loan portfolio (after making bad debt provisions as at the buyout date) was guaranteed by the Government's Exchange Fund. In other words, any subsequent loan loss in this existing loan portfolio would be recovered from the government. In early 1986, Union Bank faced an audit query raised by the bank's auditor, Coopers & Lybrand, concerning the possibility of the recovery of certain loans. A few months later, the bank faced liquidity problems due to a subsequent run on deposits and further bad loans. Eventually, the government declared the bank technically insolvent and a line of credit with amount not disclosed was extended to the bank. The government also directed Jardine Fleming, a Hong Kong based merchant bank, to assume management of the bank. On June 28, 1986, Union Bank was acquired by Modern Concept Limited which is composed of Chinese interests from the Mainland. Again, the loan portfolio was guaranteed 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 taken over by the Hang Seng Bank. In all the takeovers, the loan portfolios of the problem banks were guaranteed by the Exchange Fund of the government. On April 1, 1986, Financial Secretary John Bremridge defended such intervention B A C K G R O U N D / 15 in traditionally laissez-faire Hong Kong. He stated that the actions were taken only to protect depositors and maintain domestic and international confidence in Hong Kong's banking system, rather than to bail out bad management. Banking Commissioner Robert Fell added that the government would act again, if necessary, to prevent a bank collapse. The government intervention through unconditional guarantees was successful in restoring the stability of the financial system and in minimizing the disruption caused by subsequent bank failures. Normal business of the problem banks is almost totally unaffected and public confidence is restored. It is important to note that the guarantee granted by the government is to a certain extent political in nature. The government has to maintain the economic stability during the years of transition prior to 1997 so as to protect the British and China's interest. However, this guarantee poses a heavy burden on the Exchange Fund - the official reserve for maintaining the linked exchange rate system of Hong Kong. Moreover, such unconditional guarantees may result in adverse managerial incentives, such as moral hazard and adverse selection. With the presence of guarantee, existing management can take in deposits at the riskless rate even when deposits are risky. This is due to the fact that when the bank fails, with the guarantee given to the new management, depositors can still get back their deposits without any losses. This is exactly a subsidiary to the existing management, and the subsidiary increases with the level of risk. Therefore, existing banks are likely to take on risky investments. This excessive risk taking behaviour can hardly be controlled under the present system. IV. D E P O S I T I N S U R A N C E A N D G O V E R N M E N T G U A R A N T E E The government's policy of granting unconditional guarantees has been strongly criticised by many scholars, especially those arguing for the establishment of deposit insurance. Their argument is : since the Hong Kong government has not charged the failed bank anything prior to the granting of the guarantee, then it has no obligation to grant a "free lunch" to the failed banks. Such a "free lunch" would only result in more bank failures because of the moral hazard problem as mentioned in the previous section. The problem of "free lunch" may be solved by a pricing mechanism. But the problem of moral hazard will remain-- if the pricing mechanism does not provide the appropriate incentive against excessive risk-taking. Since moral hazard results from private actions, it can only be solved if the regulator can monitor the bank's action. Alternatively, it may be eliminated by an appropriate incentive scheme. One suggestion is given as follows: At the beginning of each period, the regulator charges the institutions with a flat premium. At the end of the period, the regulator refunds a portion of the premium to the institutions based on the individual riskiness during that period. Since the premium paid at the beginning is not entirely an out-of-pocket expense, it becomes relevant in the decision of risk-taking. Also, as the price (flat premium - refund) required to be paid by the banks is based on their relative riskiness, banks will have to assume a certain level of optimal risk. Consequently, the banks may try to avoid excessive risk-taking as such a pricing structure forces banks to internalize the costs of policies that increase bankruptcy risk.t The detail of such a scheme is out of t I am grateful that Prof. R. Giammarino & Prof. J . Zechner pointed this out to me. 16 DEPOSIT I N S U R A N C E AND G O V E R N M E N T G U A R A N T E E / 17 the scope of this paper and so will not be discussed herein. Before I proceed further, it is useful to first explore the implications of the existing measures of interventions in Hong Kong. There are two types of interventions, namely, guarantees on the existing loan portfolio (after making all necessary loan losses provisions as of the acquisition date) granted to the new managements of the failed banks and, a direct government take-over. The guarantee on existing loan portfolio is a put written by the government to the new management/shareholders of the bank with the loan portfolio (all the bad and doubtful debts to date has been cleared out from the portfolio) as the underlying asset and the promised payment of those loans as the exercise price. In other words, it is a guarantee on the existing loan portfolio acquired by the new management/shareholders. Thus future loan losses on the existing loan portfolio are guaranteed by the government so that the bank will not be affected by the "potential" loan losses left by the old management. This action is intended to prevent future bank failure due to loan losses on the existing loan portfolio. Direct government takeover is the last alternative that the government pursue in order to restore stability. When there is no appropriate buyer for the distressed banks, the government is forced to exercise this option of direct take-over. The takeovers are intended to be temporary in nature. As stated by the government, those banks will be sold back to the private sector "as soon as possible at the best price". Because none of the acquired banks have been sold, it is not DEPOSIT I N S U R A N C E AND G O V E R N M E N T G U A R A N T E E / 18 possible to foresee whether the government would, in the event of sale, grant a guarantee on the loan portfolio as. it did in the other bank failure cases. If the government grants such a guarantee, then the two measures, i.e. direct takeover and loan guarantee, do not differ in substance but only differ in timing and government involvement. The system that I am going to examine is similar to the existing system in Hong Kong. Under the hypothetical system, the government will charge for the loan guarantee instead of granting it "free-of-charge". The price of the guarantee is based on the relative risk of the bank concerned. Furthermore, it is an ex ante guarantee instead of an ex post one. Hence, the loan guarantee is a put written by the government to the bank with a striking price equal to total debt, to be scaled down by the proportion of loans to total assets. One important distinction between the proposed system and the existing guarantee issued by the government is that the . former is a put written to the existing management/shareholders of the bank but the latter is a put written to the new management/shareholders. It is important to note that the term "guarantee on advances" stands for the system I proposed above. The most apparent difference between deposit insurance and guarantee on advances is that, in the terminology of options, the former is a put written by the deposit insurance corporation (the government) to the depositors whereas the latter is a put written to the bank's shareholders. It follows that deposit insurance is a direct measure of protecting depositors but guarantee on advances is an indirect measure. In the remaining part of this section, I am going to , DEPOSIT I N S U R A N C E A N D G O V E R N M E N T G U A R A N T E E / 19 compare the two in the following aspects: 1. Effectiveness in Protecting Depositors One may argue that loan guarantee is not effective in protecting depositors. This is true when the cause of bank failure is other than huge loan losses. As it only insures the loan portfolio of the bank but not other assets, the guarantee cannot maintain the assets value of the bank, hence it cannot protect the interest of depositors in this case. But under the Banking Ordinance of Hong Kong, banks are not allowed to materially engage in business other than lending and deposit-taking (similar types of regulations also apply in other advanced countries). That is to say, the impact of losses on assets other than advances is small and unlikely to lead to bank failure. It is worth noting that under the broad category of other assets, a significant portion is interbank placements (interbank short-term deposits). If every bank is covered by the loan guarantee system, the chance for having losses on interbank placements due to other bank's default is minimal. Since the possibility of having other risks affecting the bank's resources is small, loan guarantee can be considered to be as effective as deposit insurance in protecting depositors. 2. Transactions Costs in Case of Bank Failure If there exists an unspecified linkage (due to some forms of imperfections) between failure and liquidation, the transactions costs of bank failure will be higher in the case of deposit insurance than that of loan guarantee. Under deposit insurance, depositors are the sole and ultimate beneficiaries. In the case DEPOSIT I N S U R A N C E A N D G O V E R N M E N T G U A R A N T E E / 20 of a bank failure, the insurance corporation has to take over all the assets of the bank and pay for the insured deposits. The failed bank has to be liquidated and the proceeds from the sales of its assets are used for compensating the losses of the insurance corporation. Since liquidation involves transfer of legal title, substantial legal costs have to be incurred. Under the system of guarantee on advances, because the bank's major assets, i.e. advances, are insured, the bank will not be affected even when there is substantial bad debt losses. As no liquidation procedure is involved, the huge transactions costs in liquidation can be avoided.! 3. Subsidies to Shareholders and Economic Efficiency Merton [1977] in the course of deriving the cost of deposit insurance and loan guarantee, points out that guarantee on deposits, i.e. deposit insurance, is less expensive and more efficient than guarantee on the loans made by banks. He gives no logical argument for such a conclusion. His apparent reason seems to be the widespread use of such deposit insurance and its general acceptability. As pointed out above, loan guarantee is an indirect measure of protection for deposits. It is indirect in the sense that it maintains the value of the bank's assets, which in turn, maintains the value of the deposits. Since it has a direct impact on the bank's assets, it is believed that the benefits of shareholders may also be partly protected under this system. Because the shareholders are the risk-takers in the market, it is argued that they should not be protected from the losses due to their own faulty investment decisions. If the ultimate aim of the regulator is to protect depositors, loan t I am grateful that Prof. M . Levi pointed this out to me. DEPOSIT INSURANCE A N D G O V E R N M E N T G U A R A N T E E / 21 guarantee is more costly than deposit insurance since the government is subsidizing the shareholders to recover a portion of their losses. Therefore, loan guarantee system is not economically efficient, and the same conclusion as Merton's [1977] is arrived. As I have mentioned earlier, in case of failure and given the specific conditions, the transactions costs of deposit insurance is higher than that of loan guarantee, the regulator therefore has to compare the costs and benefits of the two systems. The optimal policy should be the one which maximizes the net social benefits. Before I evaluate the relative suitability of the two systems in Hong Kong, it is important to make clear the ultimate aim of the government (the regulator). As quoted earlier in Section III, the government officials stated that the government intended to "prevent a bank collapse" and "maintain domestic and international confidence in Hong Kong's banking system". So it is clear that the government is aiming at the prevention of a bank collapse with its accompanying liquidation of bank, since in the view of the government, any bank collapse or liquidation will undermine the confidence of the general public. The confidence problem may magnify and have far reaching economic and political implications in the future of Hong Kong. The steady economic growth and prosperity of the economy may be the first to be foregone. With the ultimate aim of the government in mind, it is clear that guarantee on advances is a better measure because the possibility of having banks liquidated in case of failure is smaller. Moreover, as this system requires fewer DEPOSIT INSURANCE modifications over the existing system without incurring huge adjustment costs. A N D G O V E R N M E N T G U A R A N T E E / 22 in Hong Kong, it can be implemented V . 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. As the disclosure requirements of Hong Kong are very different from that in Canada, it is necessary to describe the basic structure and classification of a typical bank's balance sheet. The classification made in this section is based on the balance sheet of the Hong Kong and Shanghai Banking Corporation. However, the classification is never a rigid one 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 of deposit; g. Gold bullion. This line of the balance sheet represents assets of undoubted quality. 2. Bills receivables. This would include import and export bills of exchange financed or purchased by the bank. 23 S T R U C T U R E OF 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. / 24 3. Advances to customers and other accounts less provisions. This includes: a. Customers overdrafts; b. Mortgage loans; c. Other commercial loans; d. Silver and other commodities; e. All other debit balances including interest receivable. And the sum is deducted by: a. Provision for bad and doubtful debts. This item in the balance sheet is normally a material figure and represents the least liquid of the bank's dealing assets. Commercial loans may be for any number of years. In some instances, silver and other bullion may be shown as a separate item in the balance sheet if the amount involved is material and the asset is held by, say, another bank or reputable custodian. 4. Investments. It is a common item in all kinds of balance sheets, but banks are exempted from disclosing the market value of its quoted investments. 5. Interest in subsidiary companies, amount due from holding company and fellow subsidiary companies. 6. Fixed assets. This includes property and equipment to the extent that it has not been fully written off. 7. Liabilities of customers for engagements. This includes: 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. / 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. 8. Forward exchange contracts receivables These are forward contracts entered by the bank to purchase foreign currencies on behalf of customers or to cover its foreign exchange exposure. 2. Classification of Liabilities 1. Share capital. 2. Share premium. 3. Reserves.! The disclosed reserves of a bank need not show the distributable and non-distributable reserves separately, as well as the movements therein. The non-disclosed inner reserve is included under "Current, 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. All other accounts and provisions, including the provision for taxation and any inner reserves. 6. Engagements on behalf of customers/forward exchange contracts payable. These are the counterpart of "Liabilities of customers for engagements" and t They are usually retained earnings and other capital reserve account, but not deposit reserves. S T R U C T U R E OF 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. / "Forward exchange contracts receivable" respectively as mentioned above. VI. T H E MODEL The model in my paper closely follows Merton's model [1977] and the model of Ronn and Verma [1986]. Modifications have been made in order 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 [1973] suggest that the option pricing model can be used to price the debt and equity of a levered firm. Assume that: (1) The firm issues pure discount bonds which prohibit any dividend payments until after the bonds are paid off.t At maturity, the bondholders are paid (if possible), and the residual belongs to the shareholders. (2) The total value of the firm is unaffected by capital structure. (3) There are homogeneous expectations about the dynamic behaviour of the value of the firm's assets; the distribution at the end of any finite time interval is lognormal with a constant variance rate of return. (4) There is a known constant riskless rate. According to Black and Scholes, the equity of a firm can be represented as a call option on the asset value of the firm with the same maturity as that of the debt of the firms, and with a striking price equal to the maturity value of the debt. From put-call parity, value of call + present value of striking price = value of put + share price. Because common stock is a call written on the firm's assets, "share price" must be interpreted as "asset value". Also, "present value of striking price" is the t This assumption can be relaxed. 27 T H E M O D E L / 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 striking price equal to the promised payment to the debtholders. Having the put, stockholders are allowed to escape the consequences of their promise to repay the debt to the debtholders. In the context of this model, the debt of the bank is the deposit and other non-deposit debt liabilities. Hence, following the Black-Scholes option pricing model, I have E = VN(f | ) - BN(f 2 ) (1) where f, = {ln(V/B) + (Sv2T)/2}/(Sv^T) , f 2 = f,- S W T , E = the equity of the bank, V = the asset value of the bank, T H E M O D E L / 29 B = the face value of total debt of the bank, T = time until next audit of the bank's assets, Sv = instantaneous standard deviation of the rate of return on the value of the bank's assets. It may first be noted that the risk-free rate of interest does not appear in equation (1). In the Black-Scholes option pricing model, the risk-free rate of interest enters only in the factor with which the 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. deposits) is the present value of the striking price in my context, 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 is not strictly applicable because most deposits in a bank are of the demand type. However, if one interprets the length of time until maturity, T, as the length of time until the next audit of the bank's assets, then from the point of view of the guarantor (the regulator), the structure of the model is reasonable even for demand deposits. In other words, from the point of view of the 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 standard deviation of the rate of return on the value of the bank's assets. Another equation is therefore needed in order to solve for the two unknowns. T H E 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()} (2) By solving the simultaneous equations (1) and (2), the solution pair (V, Sv) which is originally unobservable can be obtained. The current market value of the bank's assets, V , is a by-product in the attempt of assessing the "fair" price of guarantee and insurance premium. But it has important implications for other regulatory measures. For example, the V can be used in assessing the capital adequacy of individual banks, which can be used to predict bankruptcy. Defining capital as the difference between assets and total debts (deposits plus other debts), the larger the ratio of capital to assets (or the smaller the debt-to-asset value ratio), the safer the deposits [see, for example, Sharpe, 1978]. The effects of the debt-to-asset value ratio on the prices of guarantee on advances and deposit insurance premiums are illustrated in the following subsections. T H E M O D E L / 31 2. Price of the Government Guarantee on Advances The use of the option-pricing approach to estimate appropriate prices of the government guarantee or premium rates offers three advantages relative to the use of historical, system-wide loss experience. First, contingent-claims analysis allows for bank-specific estimates of the price or premium. Second, the appropriate price or premium can be computed using data collected over fairly short time periods. The assumption that the data collected are still relevant to the problem at hand is thus more palatable. Third, the options are highly levered. So valuation is not based on historical losses figures. Having taken the above advantages into account, Merton [1977] examines the pricing of insurance contracts and loan guarantees in the option-pricing context. Basically, he follows the standard assumptions of 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 at the expiration date of the contract, the market value of the insured asset Vt is less than its insured value, X, then the insurance contract will pay the holder of the policy the difference, X - Vt. If the market value of the insured asset is greater than its 'insured value, then there is no payment. Thus at the expiration date, the value of the insurance contract, Y , will be the maximum of either the difference between the insured value and the market value of the asset, or zero: Y = max[X - Vt, 0]. T H E M O D E L / 32 This contract is equivalent to a European put option on the asset with an exercise price set at the insured value of the asset. The insured asset in the case of guarantee on advances, 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 2) - DN(h,) where h , = {ln[(B/D)(D/V)] - t/2}/Jt = {ln(b) - t/2}/Jt , h 2 = h, + Jt , t = S v 1 T is the variance of the logarithmic change in the value of the assets during the terms of deposits 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(h2)] - 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 in the price with respect to an increase in t is also positive. Hence, an increase in either the variance rate of the asset value or the length of time that the guarantee is in force will increase the price per dollar of advances. T H E M O D E L / 33 As indicated above, this price of the guarantee per dollar of advances is risk-adjusted. The higher the risk of the bank, the higher the price charged. If the government charges such a price on the guarantee rendered, the management of the banks are likely to act more prudently and so excessive risk-taking is prevented. 3. Deposit Insurance Premium The case of deposit insurance premium is similar, but not identical, to the case of the price of guarantee on advances. The main difference between the two is that in this case the insured value is the present value of total debt, i.e. the face value of total debt. There is a little complication at this point because it is necessary to divide total debt into two parts. One is the deposits of the general public, B | , which is insured. The other part is all the non-deposit liabilities of the bank, B 2 . Total debt is denoted by B. The value of the put, P, is given by P = B, N(k 3 ) - [(VB,)/(B, +B 2 )]N(k.) where k, = {ln[B,/(VB,/B)]-t/2} I At = {ln[b]-t/2} Ut = h, , k 2 = k, +„ / t = h x , b = B/V is the current debt-to-asset value ratio. Therefore, the cost of the insurance per dollar of insured deposit, d which is defined to be P/Bi , can be written as a function of two variables: d(b,t) = N(k 2 ) - (l/b)N(k,) The change 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 T H E M O D E L / 34 l e n g t h of t i m e t h a t the i n s u r a n c e is i n force w i l l i n c r e a s e the cost per d o l l a r of deposits. C o m p a r i n g the p r i c i n g f o r m u l a e of g u a r a n t e e on a d v a n c e s a n d deposit i n s u r a n c e , the f o l l o w i n g r e l a t i o n s h i p is revealed: g(b,t) = bd(b,t). A s the debt-to-asset v a l u e r a t i o , b, i s a l w a y s s m a l l e r t h a n one, t h e n the p r i c e of the g u a r a n t e e per d o l l a r of advances is a l w a y s s m a l l e r t h a n the deposit i n s u r a n c e p r e m i u m p e r d o l l a r of deposits. A n o t h e r p o i n t w o r t h n o t i n g i s t h a t the two a r e p r o p o r t i o n a l to each other. VII. DATA For the purpose of this study, six years data (1980-85) on the weekly closing stock prices and financial statements of the eight listed banks have been collected. Current asset values and, point estimates of deposit 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 Industrial & Commercial Bank (listed on the stock exchange since 1981); 3. K a Wah Bank; and 4. Union Bank. One important note is the different financial year for the sample banks. Two of them, namely, the Hong Kong Industrial & Commercial Bank and Overseas Trust Bank have a financial year ended on June 30. Other sample banks have their financial year ended on December 31. Another important point is that the figures of "Current, deposit and other accounts" on the liability side of the banks' statements are used as proxies for their deposit figures. 35 VIII. E M P I R I C A L FINDINGS A N D R E S U L T S By employing the subroutine Z S C N T f of the International Mathematical and Statistical Library (IMSL), equations (1) and (2) can be solved simultaneously. The two unknowns V and Sv can then be found for each observed E , B, and Se. With the solution pair (V, Sv), point estimates of the price of the government guarantee on advances and the deposit insurance premium can be computed by employing the equations in sections VII. 2 and VII. 3. This procedure is repeated for each of the sample banks on an annual basis. For the failed banks, namely, the Hong Kong Industrial & Commercial Bank (HKIC), Overseas Trust Bank (OTB), K a Wah Bank (KWB) and Union Bank (UB), point estimates for the year 1985 are not shown because balance sheet data were. not available until those banks were taken over. The results over the study period are shown in Table II to Table VII. The banks are ranked in descending order of their annual deposit premiums. The rankings by the prices of guarantees are the same as that by deposit premiums, with a small exception in the year 1981. There are a number of interesting findings in those results. First, as shown in Table VIII, all the non-failed banks except the Hong Kong Bank (HKB) have the market value consistently higher than the book value. All the failed banks have their market value lower than the book value prior to failure. Fig. I gives the average figures for the two groups. As depicted from Fig. I, on average, the t The purpose of the subroutine is to solve a system of nonlinear equations. In this study, double precision is used. 36 EMPIRICAL FINDINGS A N D R E S U L T S / 37 book values of the non-failed banks' assets are stated conservatively. For the failed banks, the market values of their assets usually fall short of the stated book values. Moreover, the differences between book values and market values tend to increase as approaching to the failure date. The cases of individual banks are given in Fig. II. It is found that H K B has its market value consistently lower than the book value. As a whole, the differences (in relative term) between book values and market values of all the sample banks are not stable over time. In other words, the regulator cannot approximate market values based on the reported book values. Second, Fig. I and II both indicate that all banks experienced substantial drops in market value in the year 1982. The drop is attributable to a common factor, i.e. the political uncertainty in the future prospect of Hong Kong. Because of the drop in market value, the debt-to-asset value ratio for individual bank shows sharp increase in that year (see Fig. V). Third, as shown in Table IX, for the period 1981-1984, the two non-failed banks, namely, the Bank of East Asia (BEA) and Hang Seng Bank (HSB) have the highest average annual deposit premiums. However, the average premiums for the other two non-failed banks, i.e. Wing Lung Bank (WLB) and H K B , are the lowest. A more interesting observation is that the average annual premium for the non-failed group is higher than that of the failed group. A clear picture is given in Fig. III. The annual average premiums of the failed group and the non-failed group both increased in 1983. But for the non-failed group, there is a drop in average premium since 1984 whereas the premium for the failed group EMPIRICAL FINDINGS A N D R E S U L T S / 38 further increased in that year because of the increases in the debt-to-asset value ratio. Fourth, the average risk of the rate of return on the bank's assets - measured by Sv, for the group of non-failed banks is again higher than that of the group of the failed banks. In fact, B E A , HSB and W L B rank second, third and fourth respectively as I rank the banks in descending order according to their average Sv for the period 1981-84 in Table X . The average Sv for the two groups of banks are given in Fig. IV. For both groups, a general consistent downward trend can be found, though for the non-failed group, the 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, the point estimates of deposit insurance premiums show substantial decreases for the year. Actually, such a trend can also be found for the cases of B E A and H S B in the year 1984, while the point estimates for KWB and HKIC show large increases. These characteristics can be explained in terms of the banks' history. In 1983, two large conglomerates representing the interests of overseas Chinese, namely, Eda and Carrian, went bankrupt, resulting in large loan losses for most of the financial institutions in Hong Kong. The failure of the two conglomergates, the deterioration in other non-performing syndicated loans (e.g. the Associated Hotel), and the failure of the Hang Lung Bank, signalled the vulnerability of the economy of the South East Asia region. It is likely that the managements of EMPIRICAL FINDINGS A N D R E S U L T S / 39 the non-failed banks anticipated the potential problems in the industry. In 1984, they began to avoid new loans with high risk, and tried to lower the debt-to-asset value ratio. This argument is supported by empirical findings. As shown in Table XI, in 1984, the debt-to-asset value ratios for most of the non-failed bank dropped. Since the bank managements could not reduce the overall risk within a short period of time (because the loan terms for existing loans would usually be longer than one year), there is no evidence for any drop in Sv. However, such drop was apparent in the year 1985. On the other hand, the debt-to-asset value ratios for all the failed bank increased in 1984., Such increases may account for the difficulties they faced in 1985. Fig. V gives the average debt-to-asset value ratio for the failed and non-failed groups. It is shown that the ratio for the failed group increases consistently from 1981 to 1984. For the non-failed group, the ratio shows a modest decrease and it is lower than that of the failed group in 1984. This result is consistent with the argument above. The plots of 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 non-failed banks, deposit constitutes a higher percentage in total debt as 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 (of attracting deposits and of raising equity) and so they have to finance their assets with other debts. Amongst the various types of other debts, debts from deposit taking companies is EMPIRICAL FINDINGS A N D R E S U L T S / 40 most commonly used, and the interest cost of this type of debt is substantially higher than that of bank deposits. Therefore, the failed banks have to operate in a narrower margin. The narrow margin or even negative margin may also account for their failure. From the empirical findings, it can be seen that with the absence of risk measure in Hong Kong, banks tend to increase the volatility of their assets by engaging in riskier loans in the prosperous years. Also, they tend to increase the debt-to-asset value ratio by attracting more deposits or issuing more non-deposit debt when they are optimistic about the market condition. On the other hand, they try to act in opposite direction when they are pessimistic. Failures of financial institutions, then, are attributable to the faulty expectations made by managements, or the inability to reduce risk (because of, for example, constraints on loan term) under adverse market conditions. Therefore, there is a need for the regulator to establish a risk-oriented evaluation scheme to monitor the behaviour of financial institutions so as to protect the general public from the losses of such faulty decisions/actions. In fact, this model is developed to serve such a purpose. As shown in Fig. VI to Fig. XIII, none of the sample banks has market value fallen below its total debt. Alternatively speaking, in this study, none of the banks would be predicted to be failed. The failure in prediction may be attributed by the following factors. EMPIRICAL FINDINGS A N D R E S U L T S / 41 First, up-to-date data cannot be obtained for this study. The actual failures of KWB and U B occurred in late 1985 and early 1986, but only the data of the year ended December 1984 can be obtained. The same is true for both OTB and HKIC. They failed in mid 1985 but only the data of the year ended June 1984 can be obtained. If the signal of failure is only reflected in the up-to-date information, then it is impossible to predict failure based on the available information set. But this should not be a problem to the 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. As I have indicated before, the information about provision for bad debt is not available to the general public, therefore, investors have to rely on the auditor's report about the adequacy of the provision. If the provision is understated but the auditor has not brought it to investors' attention or even failed to recognise the fact of inadequacy,! the market value of the bank's equity will be biased upward and in turn, the market value of the bank's assets will be overestimated. On the other hand, the management who has the inside information may take advantage of this situation of asymmetric information. If the pricing of the bank's securities is only based on the publicly available information (but incorrect information), the market is only efficient in semi-strong form but not in the strong form. t Coopers & Lybrand, the former auditor of OTB, is sued by the new management of OTB for negligence. The small shareholders of the bank are also planning to sue the auditor for damages. EMPIRICAL FINDINGS A N D R E S U L T S / 42 This argument is supported by empirical facts. In the failure case of OTB, it was found that at least one of the directors had sold the company's stocks before the collapse of the bank.t But the market did not seem to react to this and so the small investors suffered from heavy capital losses. The problem of asymmetric information and insider trading can be solved by the government. The government can modify the disclosure requirements so as to make the financial statements more informative. On the other hand, 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 the interest of the major shareholders of OTB. This was revealed by one of the financial newspapers in Hong Kong after the failure of the bank. EMPIRICAL FINDINGS A N D R E S U L T S / 43 Table I. Abbreviations for the names of the sample banks. K W B K a Wah Bank UB Union Bank OTB Overseas Trust Bank H K B Hong Kong Bank B E A Bank of East Asia HSB Hang Seng Bank W L B 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 K W B 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 H K B 109,092.79 87,202.00 6.8011 30.8155 0.000010 0.000008 B E A 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 W L B 4,656.13 3,144.75 9.1894 26.9124 0.000000 0.000000 EMPIRICAL FINDINGS A N D R E S U L T S / 44 Table III. Annual deposit premiums for the year 1981. Name V B Sv Se d g B E A 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 K W B 4,003.00 3,239.71 10.3844 48.6657 0.000886 0.000717 W L B 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 H K B 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 Table IV. Annua l deposit premiums for the year 1982. Name UB B E A HSB W L B HKIC K W B H K B OTB V 2,375.72 9,948.31 2,483.19 4,748.63 B 1,909.99 8,606.31 40,429.25 34,863.30 5,841.72 5,047.40 2,098.05 4,327.44 152,517.66 140,002.00 8,001.90 6,311.31 Sv 12.2178 7.7701 7.8800 7.1913 7.1559 4.0974 3.1815 7.7686 Se 55.1618 48.8869 48.7576 45.2262 40.4676 36.6798 30.2873 30.2873 0.002012 0.001010 0.000988 0.000602 0.000242 0.000173 0.000036 0.000027 g 0.001618 0.000874 0.000852 0.000520 0.000205 0.000158 0.000033 0.000022 EMPIRICAL FINDINGS A N D R E S U L T S / 45 Table V. Annual deposit premiums for the year 1983. Name V B Sv Se d g HSB 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 B E A 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 W L B 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 K W B 5,470.48 5,076.91 3.3213 34.8645 0.000147 0.000136 H K B 178,348.62 166,495.00 1.8535 20.6393 0.000001 0.000000 Table VI. Annual 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 K W B 5,936.70 5,566.83 3.7441 43.2748 0.000676 0.000634 W L B 7,025.68 6,276.16 5.5708 42.8807 0.000468 0.000418 B E A 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 H K B 194,916.05 176,888.00 3.6666 31.8227 0.000049 0.000044 E M P I R I C A L FINDINGS A N D R E S U L T S / 46 Table VII. Annual deposit premiums for the year 1985. Name V B Sv Se d g W L B 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 B E A 15,573.85 13,600.49 3.8711 26.0629 0.000002 0.000002 H K B 238,230.84 219,978.00 2.3091 23.1589 0.000002 0.000002 EMPIRICAL FINDINGS A N D R E S U L T S / 47 Table VIII. Market values and book values of individual banks (in i HK$million). Name 1980 1981 1982 1983 1984 1985 B E A -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 H K B -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 HSB -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 W L B -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 HKIC -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 --• K W B -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 -OTB -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 -UB -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 -EMPIRICAL FINDINGS AND RESULTS / 48 Table IX. Average annual premiums and prices for guarantees for the period 1981-84. Name BEA HSB UB HKIC OTB KWB WLB HKB 0.001870 0.001143 0.001115 0.000906 0.000727 0.000471 0.000447 0.000022 g 0.001370 0.000957 0.000780 0.000830 0.000628 0.000411 0.000391 0.000019 Average premium for the non-failed group = 0.000871 Average premium for the failed group = 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 B E A 11.4274 HSB 10.1763 WLB 8.6429 OTB 7.3522 HKIC 6.5775 KWB 5.3868 H K B 3.1759 Average Sv for the non-failed group = 8.3556 Average Sv for the failed group = 8.3252 Table XI. Debt-to-asset value ratio. Name 1980 1981 1982 1983 1984 1985 B E A 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 H K B 0.7993 0.8513 0.9179 0.9335 0.9075 0.9234 . W L B 0.6754 0.6034 0.8640 0.8918 0.8933 0.8889 U B 0.6850 0.5255 0.8040 0.8338 0.8494 K W B 0.8069 0.8093 0.9113 0.9281 0.9377 HKIC -- 0.7900 0.8449 0.8893 0.9412 OTB 0.9308 0.8277 0.7887 0.8714 0.9267 Table XII. banks. Deposits (expressed EMPIRICAL FINDINGS AND RESULTS / 50 as a percentage of total debt) of individual Name BEA HKB HSB WLB HKIC KWB OTB UB 1980 66.05 83.47 95.21 87.65 65.15 59.27 67.73 50.44 1981 65.43 90.74 83.07 89.24 64.16 63.81 74.26 69.47 1982 82.18 93.82 93.86 83.26 79.84 75.57 80.06 81.00 1983 83.96 93.45 92.49 88.90 82.22 77.38 82.41 78.73 1984 90.82 94.14 98.83 91.11 78.56 80.86 83.93 82.78 1985 92.37 90.87 99.22 92.20 EMPIRICAL FINDINGS AND RESULTS / 51 Fig. I. Average market values (expressed in terms of percentage of the book values) of the failed and non-failed groups. EMPIRICAL FINDINGS A N D R E S U L T S / 52 Fig. II. Market values (expressed as a percentage of book values) for individual banks. 1*0 120 100 I4« [26 loo 130 H ( CO So It Si 8z . /•? «i HI g4- g<T Ifeat HS6 Jt Jfx Si H St t/w HMC 0T6 % 120 |eo Jo ICO 14-0 12.0 HUB SI n Si . H I2C (CO So % I o o d!2 «£* f4 loLrS Si $2 Si M fa H^-r r^8 0-6 EMPIRICAL FINDINGS AND RESULTS / 53 Fig. III. Annual average premiums for the failed and the nonfailed groups. 4 o- oci.3 O.OCfi o OOi I O.CDiO 0 oeeS o.cooj • o.tocC -o.oooZ • 0 toc4-0. ooo5 o. oco £ o. coot O. 2 i *4- as — footed, Pjrwy Fig. IV. EMPIRICAL FINDINGS A N D R E S U L T S / 54 Annual average Sv for the failed and non-failed group. EMPIRICAL FINDINGS A N D R E S U L T S / 55 Fig. V. Average debt-to-asset value ratio for the failed and non-failed groups. EMPIRICAL FINDINGS A N D R E S U L T S / Fig . VI . Market value, book value, total debt and deposits of B E A . 1o o o ( 2 .ceo \o.coo i.eco 4-.CCV 1 2.ooo i 0 —< 1 » 1 r-S\ Sz Si ft g$ > EMPIRICAL FINDINGS A N D R E S U L T S / Fig. VII. Market value, book value, total debt and deposits of HKB. >4-0' coo -3.lo.ceO SI 82 U $q s5 EMPIRICAL FINDINGS A N D R E S U L T S / 58 Fig. VIII. Market value, book value, total debt and deposits of HSB. EMPIRICAL FINDINGS A N D R E S U L T S / 59 Fig. IX. Market value, book value, total debt and deposits of W L B . EMPIRICAL FINDINGS A N D R E S U L T S / X. Market value, book value, total debt and deposits of H K I C . EMPIRICAL FINDINGS A N D R E S U L T S / 61 Fig . XI. Market value, book value, total debt and deposits of K W B . iioCO -I i. occ A >.cco EMPIRICAL FINDINGS A N D R E S U L T S / 62 Fig . XII. Market value, book value, total debt and deposits of O T B . EMPIRICAL FINDINGS A N D R E S U L T S / 63 Fig. XIII. Market value, book value, total debt and deposits of U B . ftMM(i< 4,000 2.2CO 1 \r.->vO n a H CONCLUDING REMARKS In this paper, I have outlined the current structure and system of the banking sector in Hong Kong. A brief description on the past failure history has also been presented. Given the Hong Kong government's ultimate aim, i.e. prevention of bank collapse and liquidation, I have come to the conclusion that the hypothetical system of loan guarantee offers many advantages when compared to deposit insurance. Furthermore, I have demonstrated the feasibility of estimating the current market value of bank's assets, and also the risk-adjusted price for loan guarantee and deposit insurance premium in the context of this simplified model. Actually, the risk-adjusted prices and premiums can be regarded as measures of the bank's risk. Therefore, the regulator in Hong Kong can make use of these information for monitoring purposes, even if the government is reluctant to introduce risk-adjusted deposit insurance or the hypothetical system of loan guarantee described in this paper. Moreover, the current market value of bank's assets is important for regulatory purposes. With this "fair" market value, the regulator can assess the debt-to-asset value ratios for individual bank. By setting a standard on capital adequacy, the regulator can impose an upper limit to the debt-to-asset value ratio. The model developed in this paper has two further advantages besides those mentioned in Section VI. 2. First, the model is based on common sense and 64 / 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 with their returns. Such functional relationships are reasonable and can be easily understood. Second, the model is robust in nature [see Ronn and Verma, 1986]. With some modifications, the model can be extended to estimate the "fair" risk-adjusted premiums for banks that do not have publicly traded equity. Therefore, the model can be applied to the whole banking industry for regulatory purposes. / 66 REFERENCES 1. Asiaweek, Asiaweek Ltd., Hong Kong. 2. The Banking Ordinance 1986, Hong Kong: Government Publications Centre, Hong Kong, 1986. 3. B L A C K , F . , and Scholes, M . "The Pricing of Options and Corporate Liabilities." Journal of Political Economy 81 (May/Jun 1973), 637-59. 4. C A M P B E L L , T. and Glenn, D. "Deposit Insurance in a Deregulated Environment." Journal of Finance 39 (Jul 1984), 775-87. 5. COOPERS & L Y B R A N D , H O N G K O N G . Course Materials for Banking Courses, 1986. 6. FISCHER, S. "Call Option Pricing When the Exercise Price is Uncertain." Journal of Finance 33 (Mar 1978), 169-76. 7. Hong Kong 1986, Hong Kong: Government Publications Centre, Hong Kong, 1986. 8. Hong Kong Economic Report 1986, Lloyds Bank Pic , London, 1986. 9. J E N S E N , M . C . and Meckling, W.H. "Can the Corporation Survive?" Financial Analysts Journal (Jan/Feb 1978). 10. J O N E S , E.P. and Mason, S.P. "Valuation of Loan Guarantees." Journal of Banking and Finance 4 (1980), 89-107. 11. K A N E , E . J . "Technological and Regulatory Forces in the Developing Fusion of Financial Services Competition." Journal of Finance 39 (Jul 1984), 759-72. 12. , "Appearance and Reality in Deposit Insurance." Journal of Banking and Finance 10 (Jun 1986), 175-88. 13. M A R C U S , A . J . and Shaked, I. "The Valuation of FDIC Deposit Insurance / 67 Using Option-pricing Estimates." Journal of Money, Credit and Banking 16 (Nov 1984), 446-60. 14. M A S O N , S.P. and Merton, R.C. "The Role of Contingent Claims Analysis in Corporate Finance." Unpublished working paper, Harvard University Graduate School of Business Administration, Boston, M A . (1984). 15. M E R T O N , R.C. "On. the Pricing of Corporate Debt: The Risk Structure of Interest Rates." Journal of Finance 29 (May 1974), 449-70. 16. , "An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees." Journal of Banking and Finance 1 (Jun 1977), 3-11. 17. , "On the Cost of Deposit Insurance When There Are Surveillance Costs." Journal of Business 51 (Jul 1978), 439-52. 18. R O N N , E.I. and Verma, A . K . "Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model." Journal of Finance 41 (Sep 1986), 871-95. 19. SINKEY, J . F . and Miles, J .A . "The Use of Warrants in the Bail Out of First Pennsylvania Bank: An Application of Option Pricing." Financial Management (Autumn 1982), 27-32. 20. SMITH, C.W. "Option Pricing: A Review." Journal of Financial Economics 3 (Jan/Mar 1976), 3-51. 21. , "Application of Option Pricing Analysis." in James L . Bicksler ed. Handbook of Financial Economics (1979), North Holland. 22. S H A R P E , W.F. "Bank Capital Adequacy, Deposit Insurance and Security Values." Journal of Financial and Quantitative Analysis 13 (Nov 1978), 701-18. APPENDIX. WEEKLY CLOSING STOCK PRICES. Year B E A H K B HSB K W B UB W L B 1980 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 55.00 15.60 119.00 56.00 15.90 130.00 56.00 16.20 133.00 56.50 16.70 137.00 56.00 17.00 137.00 56.00 17.90 143.00 58.50 17.80 139.00 58.00 17.60 139.00 59.00 18.30 140.00 59.00 18.50 145.00 61.00 17.40 134.00 58.00 17.10 135.00 58.50 17.00 134.00 61.00 18.30 138.00 60.50 17.70 136.00 59.00 17.50 135.00 62.00 18.20 140.00 66.00 19.30 144.00 69.00 20.10 144.00 71.00 20.90 153.00 71.00 21.70 155.00 71.00 22.20 155.00 71.00 21.70 150.00 7.10 50.00 7.05 51.00 7.10 50.50 7.15 50.00 7.55 50.00 1.930 7.35 50.50 2.375 7.70 51.00 2.975 7.95 57.00 2.525 7.85 56.00 2.650 7.80 58.00 2.500 7.85 57.50 2.400 7.65 56.50 2.425 7.50 58.00 2.700 7.40 57.00 2.900 7.50 59.50 2.625 7.25 58.50 2.700 7.20 59.00 2.875 7.55 64.50 2.800 8.00 65.00 2.800 7.85 61.50 2.800 8.15 62.50 2.850 8.30 63.00 3.400 12.60 67.50 3.000 10.70 65.00 / 70 1981 68.00 69.00 66.00 66.00 69.00 73.00 79.00 80.00 80.00 97.00 102.00 99.00 107.00 111.00 111.00 70.00 76.00 84.00 42.00 42.00 41.50 41.50 41.50 41.50 20.50 19.80 17.90 18.90 21.60 23.10 23.50 23.10 22.20 22.80 23.10 22.50 21.90 21.80 21.10 19.70 16.30 16.40 16.30 15.30 14.90 15.00 14.90 14.90 145.00 144.00 132.00 136.00 149.00 163.00 171.00 172.00 168.00 169.00 176.00 170.00 167.00 168.00 164.00 163.00 116.00 117.00 117.00 114.00 115.00 116.00 118.00 117.00 2.925 2.800 2.350 2.650 2.900 3.275 3.150 3.100 3.050 3.075 3.275 3.500 3.700 3.700 3.450 3.500 3.750 3.950 3.775 3.725 3.300 3.150 3.100 3.075 10.20 9.40 8.35 8.30 9.50 11.10 11.70 11.50 11.50 11.60 12.30 11.70 11.30 11.00 9.80 9.20 9.80 9.80 9.70 9.45 7.35 7.70 7.70 7.50 64.00 72.50 68.00 72.50 79.50 87.00 89.50 90.00 92.00 93.50 99.00 95.00 90.00 89.00 87.00 86.50 85.00 85.50 83.00 82.00 79.50 82.00 83.00 83.00 / 71 50.00 15.80 122.00 64.50 15.90 122.00 63.00 16.70 128.00 62.00 16.90 129.00 91.00 17.50 136.00 77.00 16.60 133.00 77.00 16.70 134.00 74.00 16.80 145.00 81.50 17.10 149.00 78.00 17.40 147.00 74.50 16.50 140.00 76.00 17.10 142.00 77.00 16.80 140.00 75.50 16.70 141.00 76.00 16.90 141.00 73.00 16.60 138.00 71.00 15.90 134.00 68.00 15.20 129.00 63.00 15.10 127.00 52.00 14.20 117.00 47.00 13.40 108.00 55.00 14.00 110.00 54.50 13.70 110.00 53.00 13.80 109.00 3.000 . 7.85 87.00 3.200 8.05 95.00 3.350 9.35 110.00 3.700 11.00 114.00 4.900 12.60 121.00 4.950 12.60 128.00 4.600 12.20 127.00 4.400 12.70 125.00 4.600 13.60 127.00 4.750 14.20 125.00 4.450 13.50 114.00 4.425 14.50 113.00 4.550 16.40 114.00 4.400 16.30 113.00 4.400 18.10 110.00 4.350 20.40 110.00 4.050 19.80 96.00 4.200 21.50 101.00 4.350 18.00 98.00 4.000 15.20 92.00 3.500 13.00 82.00 3.600 13.80 86.00 3.600 13.80 86.00 3.400 13.20 85.00 64.00 14.10 113.00 67.00 14.60 118.00 69.00 14.90 126.00 67.00 14.70 125.00 67.00 15.00 128.00 65.50 14.70 127.00 67.00 14.70 128.00 64.00 14.20 122.00 66.00 14.30 124.00 60.00 14.60 125.00 68.50 14.60 127.00 67.50 14.80 126.00 65.00 15.00 129.00 66.00 15.10 129.00 62.50 14.80 125.00 61.00 14.40 119.00 61.00 14.60 120.00 60.00 14.70 120.00 42.75 14.10 110.00 43.75 14.70 115.00 42.50 14.60 116.00 41.50 14.70 92.00 37.75 14.80 89.50 37.75 14.90 90.50 / 72 3.575 13.20 89.00 4.050 14.90 96.00 3.975 13.90 104.00 3.700 13.30 110.00 3.700 13.60 107.00 3.650 13.70 108.00 3.650 16.70 117.00 3.425 16.60 111.00 3.450. 16.10 114.00 3.450 16.50 114.00 3.650 16.50 117.00 3.600 15.80 115.00 3.525 15.60 114.00 3.600 15.50 118.00 3.550 14.20 119.00 3.500 12.70 111.00 3.500 12.80 113.00 3.500 12.90 113.00 3.300 10.40 105.00 3.400 12.00 104.00 3.450 12.00 87.50 3.450 11.00 83.00 3.425 10.90 80.00 3.250 10.60 80.00 / 73 39.00 38.25 40.75 43.00 43.00 42.00 43.50 42.50 41.50 40.25 40.00 39.75 39.50 39.75 41.50 38.25 37.50 30.00 30.00 29.60 31.60 31.00 31.00 31.00 10.80 11.30 11.60 12.10 11.80 11.60 11.80 11.60 11.50 11.30 11.20 11.20 11.10 11.20 10.90 10.40 10.10 9.05 9.40 9.70 9.85 9.75 9.85 9.90 89.00 89.00 91.50 93.00 91.50 90.50 91.50 90.50 89.50 89.00 88.00 87.50 85.50 86.50 82.50 76.50 72.50 62.50 62.50 62.00 63.00 63.50 63.00 64.00 2.750 2.900 3.100 3.150 3.100 3.050 3.025 2.950 2.900 -2.825 2.850 2.800 2.750 2.800 2.700 2.500 2.450 2.350 2.300 2.350 2.400 2.350 2.350 2.300 10.80 11.20 13.30 13.10 12.60 12.50 12.60 12.50 11.70 11.40 11.20 11.10 11.00 11.80 11.40 10.70 10.90 9.00 10.00 10.02 10.00 9.70 9.60 10.00 80.00 79.50 84.00 84.00 85.00 83.50 83.50 81.00 80.00 76.50 73.50 73.50 74.50 78.00 76.50 68.00 67.50 53.00 54.00 54.00 55.50 59.50 61.00 59.50 / 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 1983 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 32.50 9.00 42.75 32.50 9.10 43.00 32.75 9.25 46.25 32.25 8.75 48.50 29.80 8.15 44.25 30.25 8.30 44.00 29.80 8.20 42.00 27.60 7.95 41.75 27.50 8.05 40.75 26.00 7.95 40.00 27.00 7.85 40.50 25.60 7.80 39.25 28.30 8.20 42.25 29.30 7.95 42.00 29.50 8.15 42.50 30.25 8.40 45.00 32.00 8.40 49.00 33.00 8.35 51.00 29.60 8.15 49.50 27.50 7.95 48.75 27.60 7.90 48.50 26.50 7.75 46.00 26.00 7.80 43.75 1.880 7.05 46.75 1.800 7.10 47.00 1.840 7.10 43.50 2.050 7.35 50.50 2.100 7.35 50.00 1.850 7.70 46.50 1.830 7.60 46.00 1.760 7.25 45.50 1.700 6.80 44.50 1.650 6.75 43.75 1.580 6.45 40.50 1.610 6.70 42.50 1.570 6.40 40.50 1.650 6.80 44.00 1.680 6.50 42.00 1.720 7.00 43.50 1.800 7.15 44.00 1.800 7.60 47.00 1.910 7.70 48.00 1.950 7.55 47.00 1.840 " 7.10 44.25 1.860 7.05 44.00 1.780 7.00 42.00 1.800 7.00 40.50 / 76 27.20 7.75 42.00 1.750 6.70 39.75 26.40 7.55 40.50 1.630 6.50 ' 36.50 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 1984 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 28.60 8.75 44.75 28.30 8.75 43.50 29.40 8.80 44.00 29.30 9.00 45.75 28.80 9.45 45.25 26.70 9.60 47.00 23.30 8.75 36.00 25.00 9.20 39.00 24.60 7.30 39.00 25.70 7.40 41.50 24.00 7.10 38.50 23.20 6.85 37.50 21.00 6.25 35.50 20.02 6.20 34.50 20.09 6.20 33.75 21.70 6.15 33.75 22.70 6.35 35.50 22.30 6.25 35.00 22.00 6.20 34.00 21.00 6.05 33.00 18.20 5.75 30.25 18.10 5.30 25.90 19.10 5.50 27.90 19.20 5.45 27.30 / 77 1.600 6.10 35.75 1.580 5.95 35.50 1.580 6.05 35.50 1.580 6.15 35.25 1.610 6.30 36.00 1.710 6.45 37.75 1.430 5.40 32.75 1.590 5.50 31.25 1.600 5.30 31.25 1.610 5.50 33.00 1.560 5.10 30.00 1.460 4.90 28.80 1.360 4.70 27.70 1.270 4.65 27.00 1.310 4.60 27.10 1.290 4.73 27.50 1.330 5.00 28.30 1.300 4.65 27.60 1.300 4.58 27.60 1.290 4.45 26.60 1.200 4.00 24.20 1.120 3.90 21.00 1.160 4.20 22.40 1.120 4.00 21.70 / 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 1985 24.80 8.60 46.00 34.50 25.50 9.25 47.75 35.00 / 79 24.70 24.30 24.50 24.40 24.70 24.80 24.80 22.80 22.10 22.40 21.80 22.70 23.30 23.00 24.20 24.30 25.40 27.90 27.00 26.30 24.00 22.00 24.10 24.40 9.05 9.05 8.90 8.70 8.95 9.00 8.85 8.80 8.35 8.40 8.50 8.95 9.10 8.00 8.00 7.95 8.35 8.35 8.15 8.10 7.80 7.30 7.85 7.70 48.50 47.00 46.25 46.25 47.25 47.25 47.25 47.00 46.50 47.00 47.50 49.00 44.50 44.50 45.50 46.25 50.00 54.00 51.00 53.00 48.00 44.00 47.50 47.00 34.00 33.50 33.00 31.50 33.25 33.00 32.75 32.00 33.00 32.75 32.50 35.50 34.75 34.50 37.50 38.50 46.75 46.25 48.75 45.00 40.00 33.25 38.75 38.50 / 80 23.50 23.60 23.00 23.50 23.10 23.00 22.80 22.60 22.80 22.70 22.50 21.30 20.40 21.60 21.50 21.80 23.00 22.70 22.70 23.70 23.50 23.90 23.70 23.70 7.60 7.70 7.65 7.70 7.90 7.75 7.75 7.70 7.75 7.40 7.35 7.20 6.80 7.15 7.00 7.10 7.50 7.40 7.70 7.75 7.70 7.75 7.65 7.60 46.50 47.75 46.25 47.25 47.50 46.25 46.75 45.75 46.00 44.00 43.50 42.00 40.50 42.25 41.75 42.50 46.25 45.00 46.00 46.25 46.75 47.00 46.25 46.50 35.00 37.00 35.75 36.25 36.00 35.50 36.00 35.50 35.50 34.50 35.00 33.75 31.50 32.50 32.50 32.50 35.50 34.50 34.75 35.50 36.00 36.00 36.25 35.50 / 81 24.40 24.50 7.55 7.55 45.00 45.50 35.50 35.50 1979/80 H K I C O T B 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 1980/81 4.350 4.225 4.300 4.300 4.350 4.275 4.575 4.550 4.500 4.575 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 5.100 4.600 4.100 3.800 3.700 4.075 4.400 4.250 4.100 4.025 4.075 4.300 4.400 4.050 4.000 3.850 3.700 3.925 7.400 7.350 7.350 7.200 7.200 8.100 7.300 6.600 6.100 4.750 5.000 6.050 6.500 6.750 6.700 6.250 6.500 6.800 7.100 6.800 6.850 5.350 5.300 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 * 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 1981/82 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 5.350 4.700 4.000 4.000 4.200 3.850 4.000 4.500 4.650 4.775 5.100 5.450 5.550 5.300 5.550 5.500 5.650 5.650 5.600 5.700 5.500 4.850 5.200 5.950 6.000 5.450 4.900 5.000 5.000 4.900 5.050 5.600 5.550 5.600 5.700 5.700 5.800 5.300 5.750 5.700 5.900 5.950 5.850 5.900 5.800 5.400 5.350 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 1982/83 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 4.300 4.300 4.475 4.550 4.700 4.500 3.625 4.000 3.850 3.650 3.450 3.450 3.500 3.300 3.200 2.800 2.850 2.800 3.000 3.025 3.100 3.450 3.550 4.350 4.400 4.450 4.650 4.475 4.650 4.625 3.900 4.000 4.150 3.950 3.650 3.950 3.750 3.425 3.000 2.875 3.000 3.025 3.100 3.500 3.500 3.975 3.850 1983/84 3.700 4.000 4.350 4.500 4.750 3.925 4.050 3.600 3.400 3.500 3.800 3.900 3.600 3.600 3.500 3.550 3.475 3.400 3.350 3.200 3.450 3.450 3.400 3.850 4.100 4.125 4.525 4.600 5.050 4.550 4.500 4.100 4.150 4.225 4.500 4.650 4.475 4.500 4.400 4.450 4.325 4.250 4.175 4.100 4.225 4.125 4.175 4.400 / 90 3.900 3.925 3.900 3.725 3.700 3.300 3.425 3.350 3.025 3.000 2.600 2.050 2.075 2.100 2.250 2.300 2.400 2.250 2.275 2.100 2.150 2.025 2.000 1.980 4.475 4.475 4.325 4.075 4.100 3.900 3.800 3.700 3.625 3.600 3.050 2.600 2.725 2.725 2.650 2.650 2.950 2.825 2.950 2.750 2.725 2.700 2.725 2.750 2.025 2.200 2.400 2.350 2.650 3.000 2.650 2.800 2.750 2.825 2.900 2.875 3.075 2.550 2.800 2.700 2.800 2.650 2.600 2.400 2.350 2.250 2.500 2.550 2.825 2.975 3.150 3.400 3.375 3.750 3.425 3.600 3.500 3.500 3.525 3.550 3.925 3.400 3.425 3.500 3.525 3.400 3.250 2.950 2.900 2.725 2.900 3.050 2.400 2.875 2.350 2.900 2.225 2.775 

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