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BUSI4426E1-23
The University of Nottingham
SCHOOL OF BUSINESS
A LEVEL 4 MODULE, SPRING SEMESTER 2022-2023
QUANTITATIVE RESEARCH METHODS FOR BANKING
Time allowed: 24 hours
Time expected: TWO hours
Answer TWO questions
ADDITIONAL MATERIAL: None
INFORMATION FOR INVIGILATORS: None
BUSI4426E1-23
BUSI4426E1-23
2
BUSI4426E1-23
Answer TWO out of five questions
Question 1
A financial analysis is given a sample of 5,000 U.S. commercial banks from 2002 to
2022.
= 0 + 1 1 + 2 + 3 + 4 +
Where: i is bank i, t is time t
Zscore: insolvency risk, measured by (return on assets + equity)/three-year rolling_xfffe_window standard deviation of return on assets. Where equity is the ratio of total
equity to total assets.
Size is logarithm of total assets
OBS is off-balance sheet/total assets
LOAN is total loan/total assets
u is error term
a) Explain in detail, which estimator is the appropriate one (pooled ordinary
least squares, fixed effects, and system GMM), given the dynamic nature of
the specification above (the presence of the lagged dependent variable).
(30 marks)
b) Discuss the choice of instruments and all the relevant post estimation
diagnostics.
(70 marks)
Question 2
Critically discuss Berger’s procedure to estimate market concentration and how his
methodology compares to the traditional Structure-Conduct-Performance
methodologies.
(100 marks)
Question 3
a) If bank capital requirements are associated with the riskiness of loans, do banks
lend too much at the top of the business cycle (when loans appear less risky, thereby
requiring less reserve capital) and too little at the trough (when loans becomes
riskier) Explain how economy-wide business cycles affect loan loss provisioning
through capital requirement regulations.
(70 marks)
b) Critically discuss the bad management hypothesis regarding the relationship
between cost efficiency and non-performing loans.
(30 marks)
Question 4
Critically discuss why bank holding companies in the U.S. are too complex to
manage, and how diversification gain and diversification discount is associated with
bank stability.
(100marks)
Question 5
Critically discuss key elements of stress tests by using an example, the challenges
associated with stress testing exercises and provide policy implications.
(100 marks)
End
BUSI4426E1-23