Tesis Doctorado
Essays on financial intermediatión
Autor
Catillo, Augusto
Universidad Adolfo Ibañez
Institución
Resumen
This work consists of three essays each of which tackles specific issues concerning important
financial intermediaries: Insurance Companies. The recent financial crisis- the subprime crisis of
2008-resulted in big companies crashing all over the world (those firms called “too-big-to-fail”).
Regulation has been revisited, focusing specially in the banking system. However, we observe
that the insurance industry has not received much attention. Insurance Companies are also a
central part of the financial system, they need liquidity to finance everyday activities, pay claims
and serve debt. Decisions related to investment policy, financing policy and risk management are
crucial in this industry. However, an effort must be made to understand their business, to read
and correctly interpret their accounting, understand what drives credit risk in this industry. That
is the only way to be aware and alert in case of negative shocks, like cash shortfalls.
Each essay in this work tries to answer a specific question related to these financial agents. Essay
1 proposes a model to verify if it is necessary to regulate or not the investments of Insurance
Companies. Using a repeated three-stage approach, this paper demonstrates that regulating only
the bank by establishing a minimum capital rate for all banks is not enough to improve the
stability of the system. Moral hazard can arise from the relation between a bank and an insurance
company, so that the latter will have a risky portfolio even when its intentions can be to invest in
fixed-income instruments and mortgage loans. We find a model with regulation applied to the
bank and the insurance company, in which a separating equilibrium with banks revealing their
true loan’s quality is achievable. Essay 2 investigates determinants of credit risk in insurance
companies. For our empirical analysis we focus on CDS spreads of U.S. and European insurance
companies. We test whether classic determinants like firm-specific control and macro control
variables drive default risk in the insurance industry, and propose investment portfolio variables as new credit risk determinants. We find that macroeconomic factors drive CDS Spreads in US,
however, in Europe, CDS Spreads seem to be driven more by other-firm specific factors. We
also find that Investment Assets determinate Credit Risk only in US Insurance Companies.
Finally, we analyze the relation between cash holdings and CDS Spreads in United States. We
find that in equilibrium cash holdings increase credit risk, but an exogenous variation in cash is
negatively correlated with it.
Finally, Essay 3 studies corporate liquidity decisions of Insurance Companies. We focus in
proving empirically if Cash Holdings and Credit Lines are substitutes in the Insurance Industry
in terms of financing liquidity needs. Secondly, we will analyze the relation between a firm’s
exposure to systematic risk and the use of bank Lines of Credit. Following Acharya et al. (2010),
our main hypothesis is that a firm’s exposure to systematic risk should be negatively correlated
to the use of Credit Lines. Finally, after analyzing determinants of the use of cash holdings and
revolving facilities, we will study the use of these sources. We find a negative correlation
between Cash Holdings and Used Lines of Credit, proving that in this industry these sources of
financing are substitutes. We find some evidence that cash holdings are used as a buffer for cash
shortfalls, but no evidence that credit lines are used to finance investment projects.