Social and Behavioral Sciences Commons^™

A Regulatory Arbitrage Game: Off-Balance-Sheet Leverage And Financial Fragility., Dimitris Voliotis

Dimitris Voliotis

This study examines a simple banking system in a game-theoretic frameworkwherein banks act as self-interested agents to maximize leverage at the expenseof overall financial stability. The resultant strategic inefficiency raises concernsabout how banks manage the “financial stability” good, which is appropriated intoa “tragedy of the commons”. We conceptualize the inefficiency using the -priceof anarchy- introduced by Koutsoupias and Papadimitriou [2009].We seek the optimal regulatory framework that minimizes the -price of anarchy- or the degree offinancial fragility.

Government Induced Bubbles, Danilo Lopomo Beteto Wegner

Danilo Lopomo Beteto Wegner

A model to study how the possibility of government intervention during market crashes impacts the investment decision of agents is developed. With crashes representing bubble burst episodes and a government policy rule based on their magnitude, it is shown that the possibility of intervention creates incentives for investors to inflate bubbles, as large bubbles (i) maximize capital gains if they do not burst and (ii) make intervention more likely, thus minimizing losses. Bubbles should be larger the less fragile the economy, the less costly the intervention and the more liquid the asset. Intervention increases welfare in extremely fragile economies.

International Reserves And Rollover Risk, Javier Bianchi, Juan Carlos Hatchondo, Leonardo Martinez

Leonardo Martinez

No abstract provided.

Ceo Compensation And Risk-Taking At Financial Firms: Evidence From U.S. Federal Loan Assistance, Amar Gande, Swami Kalpathy

Amar Gande

We examine whether risk-taking among the largest financial firms in the U.S. is related to CEO equity incentives before the 2008 financial crisis. Using data on U.S. Federal Reserve emergency loans provided to these firms, we find that the amount of emergency loans and total days the loans are outstanding are increasing in pre-crisis CEO risk-taking incentives – “vega”. Our results are robust to accounting for endogeneity in CEO equity incentives and selection of financial firms into emergency loan programs. We also rule out the possibility that our results are driven by a bank’s funding base, bank complexity, CEO overconfidence, …

Finance And Export Survival: The Case Of Mena Region And Sub-Saharan Africa, Melise Jaud, Madina Kukenova, Martin Strieborny

Martin Strieborny

The paper looks at unique firm-product-destination export data collected by custom authoritiesin four countries from the Middle East and North Africa (MENA) - Jordan,Kuwait, Morocco, Yemen as well as in six countries of Sub-Saharan Africa(SSA) - Ghana, Mali, Malawi, Senegal, Tanzania, Uganda. We use these data toexamine to impact of financial development on the long-term success ofexports from developing countries. We find that those agricultural exportsthat face particularly costly implementation of Sanitary and PhytosanitaryStandards (SPS) are also the ones that disproportionately benefit from ahigher level of domestic financial development. This result confirms theprevious findings from a smaller SSA sample (Jaudetal. …

Finance, Comparative Advantage, And Resource Allocation, Melise Jaud, Madina Kukenova, Martin Strieborny

Martin Strieborny

Can financial institutions and markets enhance the discipline imposed by competitive product markets and thus improve resource allocation in the real economy? We address this question in the context of international trade, using disaggregated product-level data from 71 countries exporting to the USA. We show that exported products exit the US market sooner if they stand far away from the exporting country's comparative advantage. This pattern is stronger when the exporting country has a well-developed banking system, but it is unaffected by the depth of stock markets. These results are in accordance with theories stressing the disciplining role of debt.

Debt Dilution And Sovereign Default Risk, Juan Carlos Hatchondo, Leonardo Martinez, Cesar Sosa Padilla

Leonardo Martinez

No abstract provided.

Fiscal Rules And The Sovereign Default Premium, Juan Carlos Hatchondo, Leonardo Martinez, Francisco Roch

Leonardo Martinez

No abstract provided.

Holes In The Dike: The Global Savings Glut, U.S. House Prices And The Long Shadow Of Banking Deregulation, Mathias Hoffmann, Iryna Stewen

Mathias Hoffmann

We show how capital inflows into and financial deregulation within the United States interacted in driving the recent boom and bust in U.S. housing prices. Interstate banking deregulation during the 1980s cast a long shadow: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to aggregate U.S. capital inflows during 1990-2012. Capital inflows relaxed the value-at-risk constraints of geographically diversified (‘integrated’) U.S. banks more than those of local banks. Therefore, integrated banks absorbed a larger share of capital inflows and expanded mortgage lending more. This drove up housing prices.

Investment In Relationship-Specific Assets: Does Finance Matter?, Martin Strieborny, Madina Kukenova

Martin Strieborny

Banks (but not stock markets) promote economic growth by facilitating relationship-specific investment between buyers and suppliers of intermediate goods. Combined insights from literature on signaling role of banks and on relationship-specific investment motivate this economic channel: A supplier is reluctant to undertake relationship-specific investment as she cannot observe financial stability and planning horizon of buyer. Banks can mitigate this information asymmetry. Empirical results from 28 industries in 90 countries confirm that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a well-developed banking sector. The channel works via increased entry of new firms and higher …

The Intuition Behind Wallace Neutrality, Richard H. Serlin

Richard H. Serlin

Wallace neutrality is a term that, as far as I know, was coined by University of Michigan economist Miles Kimball. It refers to the seminal model of Neil Wallace in "A Modigliani-Miller Theorem for Open-Market Operations", American Economic Review, June 1981. In Wallace's model, open market operations have no effect on any asset prices, including money (no effect on inflation). This is a shocking result, and it cries out for how and why. Intuitively, how and why can this possibly happen? However, like so many modern models, it's extremely difficult to see the intuition behind the wall of math, and …

Small Firms And Domestic Bank Dependence In Europe's Great Recession, Mathias Hoffmann, Bent E. Sorensen

Mathias Hoffmann

The paper studies the role of small businesses (SME) in the transmission of the Eurozone crisis to member countries and whether regions or countries with many SMEs were less able to share risk. Our analysis draws attention to domestic bank dependence---defined as the share of domestic private credit originated by domestic banks---as a key variable modulated the impact of shocks on bank-dependent SMEs and thus on the real economy. We argue that Eurozone banking integration in the years after the creation of the single currency was lopsided in the sense that, until 2008, cross-border lending between banks increased markedly while …

The Equity Beta Of Telcos Operating In Small Island Nations, Bruno E. Viani

Bruno E. Viani

Analysts often use the capital assets pricing model (CAPM) to estimate the cost of equity capital. A key parameter in estimating that cost is the so-called equity beta. Estimates of equity betas for telecommunications firms, or telcos, in small island nations are not readily available, so analysts often rely on estimated equity betas from larger firms in jurisdictions with much larger markets. Doing so may introduce significant errors if the equity risk premium for telcos in large markets differs significantly from those in small markets. In this research note we explore this hypothesis. We find that the equity betas of …

‘By A Silken Thread’: Regional Banking Integration And Pathways To Financial Development In Japan’S Great Recession, Mathias Hoffmann, Toshihiro Okubo

Mathias Hoffmann

Regional differences in banking integration and bank dependence interacted in spreading Japan’s Great Recession after 1990. Nationwide banks were generally more exposed to the crisis than regional ones, but their internal capital markets also substantially dampened the impact of the crisis in prefectures with many bank-dependent small firms. We instrument for modern-day banking inte- gration using the prefecture-level importance of the late-19th-century silk industry: export finance for the silk industry relied on local, cooperative banks. These local banks preserved their comparative advantage in relationship lending to small firms for a century, effectively segmenting regional banking markets during Japan’s lost decade.

Greece's Banking Sector Options, Warren Coats

Warren Coats

A review of the new Greek government's choices in its negotiations with its creditors, with a focus on the banking sector.

Government Insurance, Information, And Asset Prices, Danilo Lopomo Beteto Wegner

Danilo Lopomo Beteto Wegner

An investment decision problem is studied, in a framework where the government offers insurance against the possibility of the price of a risky asset falling drastically. The problem is considered under different informational scenarios, i.e., information quality, under which agents have to infer the state of fundamentals of the economy. Changes in information quality is shown to affect equilibrium prices despite no concomitant changes in the fundamentals, creating excess volatility. The possibility of government intervention is shown to increase equilibrium prices, which can be ordered as a function of information quality. Empirical evidence supporting the model is presented.

Integration Of Waqf And Islamic Microfiance For Poverty Reduction, Mohamed Aslam Haneef Prof., Ataul Huq Pramanik Prof., Mustafa Omar Mohamme Dr., Aliyu Dahiru Dr.

Aliyu Dahiru

This report presents the output of two-year collaboration between SESRIC and the Centre for Islamic Economics of International Islamic University of Malaysia (IIUM) on a research project that covered three OIC countries namely, Malaysia, Indonesia and Bangladesh. The research project aimed at developing an integrated Waqf-based Islamic microfinance model to optimize the use of combined resources of Waqf and Islamic microfinance institutions in OIC countries with a view to enhancing the effectiveness of IMF and Waqf institutions in addressing the socio-economic needs of the society, particularly through effective poverty alleviation programs. The report consists of four main sections. The first …

Aprender De Brasil, Guillermo Arosemena

Guillermo Arosemena

No abstract provided.

Long-Run Consumption Risk And Asset Allocation Under Recursive Utility And Rational Inattention, Yulei Luo, Eric R. Young

Yulei Luo

We study the portfolio decision of a household with limited information-processing capacity (rational inattention or RI) in a setting with recursive utility. We find that rational inattention combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets, even when the departure from standard expected utility with rational expectations is small. In addition, we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long-run risk and thus require higher compensation in equilibrium. Our results are robust …

Online Appendix For "Specifying An Efficient Renewable Energy Feed-In Tariff", Niall Farrell

Niall Farrell

This is an online appendix for the paper "Specifying an Efficient Renewable Energy Feed-in Tariff".

Government Versus Market Regulation: The Nanny State Or The Liberal State, Warren Coats

Warren Coats

The nanny state world is characterized by a growing list of regulations and government supervision of business in an effort to fix the most recently observed problems. The price of such protection is the increased cost of doing business, which tends to crowd out small businesses and favor large ones, which can more easily absorb the compliance costs. The benefit is often difficult to detect. Has Dodd-Frank really made it feasible to fail our largest banks (now larger than they were just before the Great Recession), i.e. are they no longer too big to fail?

The self-governing, liberal state—"Liberalism unrelinquished"—is …

Asimmetria Del Rischio Sistematico Dei Titolo Immobiliari Americani: Nuove Evidenze Econometriche, Paola De Santis, Carlo Drago

Carlo Drago

In questo lavoro riscontriamo un aumento del rischio sistematico dei titoli del mercato immobiliare americano nell’anno 2007 seguito da un ritorno ai valori iniziali nell’anno 2009 e si evidenzia la possibile presenza di break strutturali. Per valutare il suddetto rischio sistematico è stato scelto il modello a tre fattori di Fama e French ed è stata studiata la relazione tra l’extra rendimento dell’indice REIT, utilizzato come proxy dell’andamento dei titoli immobiliari americani, e l’extra rendimento dell’indice S&P500 rappresentativo del rendimento del portafoglio di mercato. I risultati confermano la presenza di un “Asymmetric REIT Beta Puzzle” coerentemente con alcuni precedenti studi …

Measuring Gender Difference In Information Sharing Using Network Analysis: The Case Of The Austrian Interlocking Directorship Network In 2009, Carlo Drago, Livia Amidani Aliberti, Davide Carbonai

Carlo Drago

In recent literature a relevant problem has been the relationship between career/personal contact networks and different career paths. In addition the recent advances in social capital theory have shown the way in which networks impact on personal careers. In particular women’s careers appear to be negatively affected by the informational network structure. The main contribution of this work is to propose empirical evidence of this phenomenon by considering the gendered directorship network with relation to Austria and to show the structural differences by gender in the network. By using community detection techniques we have found various communities in which females …

Roundaboutness Is Not A Mysterious Concept: A Financial Application To Capital-Theory, Peter Lewin, Nicolas Catchanosky

Peter Lewin

No abstract provided.

Network Formation And Financial Fragility, Danilo Lopomo Beteto Wegner

Danilo Lopomo Beteto Wegner

A tractable model of the formation of financial networks is developed, allowing the use of concepts from portfolio theory. The optimal financial network maximizes a Sharpe ratio defined for financial networks, whereas the equilibrium financial network emerges from banks bargaining over future proceeds of co-investment opportunities. Measures of financial fragility, systemic risk and robustness are developed. The equilibrium financial network is shown to be the most connected and with the lowest level of financial fragility, whereas the optimal is the one least connected and with lowest exposure to systemic risk, being also the most robust financial network.

A Reinterpretation Of The Gordon And Barro Model In Terms Of Financial Stability, Danilo Lopomo Beteto Wegner

Danilo Lopomo Beteto Wegner

A government bailout model based on the framework of time-consistent monetary policy of Barro and Gordon (83) is developed. In the model, the banking sector and the government play a game where the former chooses a bailout expectation whereas the later reacts by choosing its optimal bailout policy. The banking sector is assumed to be perfectly competitive, aiming only at anticipating the bailout policy. An excess of credit ensues and firms over-invest, which can be amended by an appropriately chosen reserve requirement. The government faces a trade-off between efficiency and stability in trying to minimize the costs of intervention.

Игры В Призрачном Мире Теневой Банковской Деятельности, Bryane Michael

Брайн Майкл

В своем анализе мы, ско- рее, делаем акцент на способах, позволяю- щих теневому банковскому сектору прино- сить пользу отдельным предпринимателям и компаниям на быстроразвивающихся рынках. Кредиты от таких «небанковских финансовых учреждений», как их часто на- зывают, способны помочь в ослаблении се- рьезных кредитных ограничений во многих анализируемых нами экономических систе- мах. Вследствие этого мы предпочли сосре- доточиться на том, каким образом отдель- ные предприниматели и компании могут предоставлять недорогие кредиты, предла- гать инвесторам доход, генерируемый та- кими кредитами, и при этом по-прежнему получать прибыль.

Banks And The World's Major Banking Centers, 2010, Adrian E. Tschoegl, Sang Rim Choi, Daekun Park

Adrian E Tschoegl

We update three earlier articles on the determinants of interpenetration of financial centers by banks by adding the year 2010 to our analyses for 1970 and 1980, 1990, and 2000. In addition, we also re-estimate our model to include data for Beijing/Shanghai, and add those emerging centers for 2010. First, the number of banks in our data and the number of their offices in other centers has fallen by 46% and 24% since peaking in 1990. Second, even so our matrix saw less turbulence than in the prior two decades as density and number of presences in other centers per …

Foreign Shocks On Chilean Financial Markets: Spillovers And Comovements Between Bond And Equity Markets, Marco Morales

Marco Morales

No abstract provided.

Finance, Productivity And Growth: Does It Work For Chile?, Marco Morales, Fernando Diaz, Fernando Lefort

Marco Morales

No abstract provided.