Search For Yield and Global Structured Product Crashes

Abstract

Average (and median) noninterest to interest income ratios across large US bank holding companies rise and collapse before the Tequila Crisis and the Global Financial Crisis, which could reflect the rise in fee income from structuring products that ultimately failed. The ratios are co-integrated with and Granger-caused by long-term US Treasury yields, suggesting declines in yields may stimulate sales of highly rated but risky structured products to investors searching for yield. Raising capital requirements as Basle III recommends may not ease the problem, but using Flannery’s (2005) reverse convertible debentures, along with traditional deposit insurance, to maintain regulatory capital might.