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This paper provides the first empirical assessment of the impact of life expectancy assumptions on the liabilities of private U.S. defined benefit (DB) pension plans. Using detailed actuarial and financial information provided by the U.S. Department of Labor, we construct a longevity variable for each pension plan and then measure the impact of varying life expectancy assumptions across plans and over time on pension plan liabilities. The results indicate that each additional year of life expectancy increases pension liabilities by about 3 to 4 percent. This effect is not only statistically highly significant but also economically: each year of additional life expectancy would increase private U.S. DB pension plan liabilities by as much as $84 billion.
Business & Economics --- Labor & Workers' Economics --- Defined benefit pension plans --- Longevity --- Life, Long --- Life extension --- Life span prolongation --- Long life --- Prolongation of life span --- Age --- Health --- Life spans (Biology) --- Old age --- Pensions --- Life expectancy --- Econometric models --- E-books --- Expectancy of life --- Expectation of life --- Vital statistics --- Premature death --- Compensation --- Pension plans --- Retirement pensions --- Superannuation --- Retirement income --- Annuities --- Social security individual investment accounts --- Vested benefits --- Insurance --- Labor --- Public Finance --- Demography --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Nonwage Labor Costs and Benefits --- Private Pensions --- Social Security and Public Pensions --- Health: General --- Economics of the Elderly --- Economics of the Handicapped --- Non-labor Market Discrimination --- Insurance Companies --- Actuarial Studies --- Health economics --- Population & demography --- Insurance & actuarial studies --- Pension spending --- Aging --- Expenditure --- Population and demographics --- Financial institutions --- Population aging --- United States
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Credit rating agencies face a difficult trade-off between delivering both accurate and stable ratings. In particular, its users have consistently expressed a preference for rating stability, driven by the transactions costs induced by trading when ratings change frequently. Rating agencies generally assign ratings on a through-the-cycle basis whereas banks' internal valuations are often based on a point-in-time performance, that is they are related to the current value of the rated entity's or instrument's underlying assets. This paper compares the two approaches and assesses their impact on rating stability and accuracy. We find that while through-the-cycle ratings are initially more stable, they are prone to rating cliff effects and also suffer from inferior performance in predicting future defaults. This is because they are typically smooth and delay rating changes. Using a through-the-crisis methodology that uses a more stringent stress test goes halfway toward mitigating cliff effects, but is still prone to discretionary rating change delays.
Credit ratings --- Credit bureaus --- Credit --- Credit information services --- Credit reporting agencies --- Mercantile agencies --- Commercial ratings --- Credit checks --- Credit guides --- Credit investigations --- Credit reports --- Ratings, Credit --- Evaluation --- Information services --- E-books --- Credit bureaus. --- Evaluation. --- Banks and Banking --- Exports and Imports --- Financial Risk Management --- Money and Monetary Policy --- Personal Finance -Taxation --- Financial Institutions and Services: General --- Investment Banking --- Venture Capital --- Brokerage --- Ratings and Ratings Agencies --- Financial Institutions and Services: Government Policy and Regulation --- Personal Income and Other Nonbusiness Taxes and Subsidies --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- International Financial Markets --- International Lending and Debt Problems --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Public finance & taxation --- Monetary economics --- Finance --- International economics --- Financial services law & regulation --- Personal income tax --- Asset valuation --- Debt default --- Credit risk --- Income tax --- Asset-liability management --- Debts, External --- Financial risk management
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This paper builds on recent research by Fender and Mitchell (2009) who show that if financial institutions securitize loans, retaining an interest in the equity tranche does not always induce the securitizer to diligently screen borrowers ex ante. We first determine the conditions under which this scenario becomes binding and further illustrate the implications for capital requirements. We then propose an extension to the existing model and also solve for optimal retention size. This also allows us to capture feedback effects from capital requirements into the maximization problem. Preliminary results show that equity tranche retention continues to best incentivize loan screening.
Asset-backed financing --- Securities --- Econometric models. --- Blue sky laws --- Capitalization (Finance) --- Investment securities --- Portfolio --- Scrip --- Securities law --- Underwriting --- Investments --- Investment banking --- Asset-backed securities --- Asset-based financing --- Asset securitization --- Securitization, Asset --- Corporations --- Covered bonds --- Law and legislation --- Finance --- Banks and Banking --- Finance: General --- Investments: Stocks --- Money and Monetary Policy --- Industries: Financial Services --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- General Financial Markets: Government Policy and Regulation --- Investment & securities --- Monetary economics --- Financial services law & regulation --- Stocks --- Loans --- Credit --- Credit risk --- Financial sector stability --- Financial risk management --- Financial services industry --- United States
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