A Descriptive Analysis of State Government Debt‐Related Derivatives Policies

Singla, Akheil; Luby, Martin J.

doi:10.1111/pbaf.12037

Cited by 6 publications

(8 citation statements)

References 10 publications

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“…One might suggest that more guidance for financial managers on how and when to use swaps and derivatives is needed. Policies governing the use of debt-related derivatives are limited in their depth of coverage at the state level (Singla and Luby 2014); it seems unlikely that policy guidance in cities would be stronger. This is one area where things can be improved, as more detailed swaps policies discussing the process by which transactions ought to be evaluated and the acceptable risk–reward tradeoff would make decisions less susceptible to underwriter or financial institution influence.…”

Section: Discussionmentioning

confidence: 99%

“…Of course, with reward comes risk, and there are numerous risks associated with these deals, the most prominent of which are basis risk and termination risk (Singla and Luby 2014). Basis risk is the chance that the two floating payments do not net out to zero.…”

Section: Background: the Mechanics Of Debt-related Derivativesmentioning

confidence: 99%

“…There have been a number of individual case studies (Denison and Gibson 2013; Luby 2012) and some descriptive work characterizing use of debt-related derivatives by groups of governments (Luby and Kravchuk 2013; Singla and Luby 2014; Stewart and Cox 2008), but there has been very little that explores potential associative factors for their use. Luby (2012) suggests that an empirical examination of the characteristics of debt-related derivative users would be useful as a lens to examine public financial managers’ decisions from both theoretical and policy perspectives.…”

Section: Introductionmentioning

confidence: 99%

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Financial Engineering by City Governments: Factors Associated with the Use of Debt-Related Derivatives

Singla¹,

Luby

2018

Urban Affairs Review

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Despite significant coverage in the financial press in recent years, financial engineering by city governments via the use of financial derivatives such as interest rate swaps remain an understudied area of urban financial policy. Indeed, press accounts and other case or conceptual urban studies research emphasizing the downside of these transactions are some of the only sources of information on these instruments. These stories and studies often allude to or speculate on a more basic question: Why would a government choose to enter into a complex financial instrument like a debt-related derivative? This research posits three exploratory hypotheses—financial health, financial experience and/or financial sector influence, and governance structure—culled from media accounts and the urban studies literature on the use of debt-related derivatives by city governments in the United States. It empirically explores these hypotheses by examining the various fiscal, financial, and issuer characteristics of the largest 50 U.S. cities and their choice of whether to use debt-related derivatives. The research finds that the characteristics of government most associated with debt-related derivative use are declining financial condition, increased financial experience and/or financial sector influence, and prior use of interest rate swaps.

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Section: Discussionmentioning

confidence: 99%

Section: Background: the Mechanics Of Debt-related Derivativesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Financial Engineering by City Governments: Factors Associated with the Use of Debt-Related Derivatives

Singla¹,

Luby

2018

Urban Affairs Review

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“…Several studies investigated the use of derivatives in federal countries, especially those adopting the International Public Sector Accounting Standards (IPSAS) such as Brailsford et al (2005); Stewart and Cox (2008); Howell-Moroney and Hall (2011); Luby (2012); Denison and Gibson (2013); Luby and Singla (2014); and Khumawala et al (2016). A detailed description of purpose, mechanism and risks of swaps in the public sector is that by Luby and Kravchuk (2013) (pp.…”

Section: Literature Reviewmentioning

confidence: 99%

The use of swaps by local administrations: the case of Italian regions, 2007–2014

Oldani

Fantini

2020

JPBAFM

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PurposeThis study contributes to the literature on local administrations' debt and attempts to answer the following research questions: (1) What effects do swaps produce on regions' debt? (2) Have swaps been used to finance discretionary debt?Design/methodology/approachThe paper investigates the debt burden as influenced by economic, financial and political variables and forces with panel data techniques, and tests whether swaps have been used to financing debt due to unfunded expenditures.FindingsPanel data results of 15 Italian regions over the 2007–2014 period shows that regions with higher debt exhibited a higher interest rate exposure and have employed derivatives hoping to counterbalance the reduced resources received from the central state, in line with other European countries' experience (i.e. France and Greece).Research limitations/implicationsThe scarcity of official data and information on swaps has limited the empirical investigations in the literature but did not reduce the losses of local administrations.Originality/valueThis study creates the first database on swaps purchased by Italian regions to investigate their impact on their debt. Results show that highly indebted regions with reduced funds from the central state and diminished local resources are more likely to use swaps to fund their debt. Italian regions heavily depended on long-term debt to finance their non-healthcare services, rather than current revenues; swaps have been used to finance discretionary (non-healthcare) debt.

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“…the GASB statement n. 53 effective since 2008). Most authors underlined the absence of policies and standardised rules on the trading, management and accounting of such complex contracts by local administrations that can explain these losses (Luby and Kravchuk, ; Singla and Luby, ). Among the others, (Khumawala et al., ) empirically investigated the use of OTC contracts by 300 US municipalities and found that interest rate swaps are the most popular contracts, and that large and more sophisticated municipalities are more likely to engage in such contracts, together with small ones if managed by unsophisticated managers.…”

Section: Literature Reviewmentioning

confidence: 99%

On the Perils of Structured Loans Financing in France and Italy

Oldani

2019

Global Policy

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The restructuring process of sovereign debt is not yet managed under common global rules; public debt stabilisation is an explicit policy goal in the EU, but cannot be achieved if local public authorities do not control their liabilities and connected risks. EU local administrations’ debt soared due to the economic downturn, reduced resources transferred from the central state and increasing expenses. After 2000, French and Italian local authorities extensively underwrote complex financial instruments, such as over the counter (OTC) interest rate and exchange rate derivatives and structured loans (i.e. loans with embedded derivatives) to manage their growing liabilities; the proliferation of derivatives among European public administrations has been favoured by the absence of proper disclosure and of monitoring procedures. Losses due to structured loans accumulated and in 2017 French local authorities asked for state rescue; similarly, some Italian regions and municipalities reported relevant losses. The reduction of financial risks can be achieved by improving information and transparency, by reducing moral hazard, and limiting ‘revolving doors’.

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A Descriptive Analysis of State Government Debt‐Related Derivatives Policies

Cited by 6 publications

References 10 publications

Financial Engineering by City Governments: Factors Associated with the Use of Debt-Related Derivatives

Financial Engineering by City Governments: Factors Associated with the Use of Debt-Related Derivatives

The use of swaps by local administrations: the case of Italian regions, 2007–2014

On the Perils of Structured Loans Financing in France and Italy

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