|
on Banking |
| By: | Enrico Perotti (University of Amsterdam) |
| Abstract: | This survey reviews how a recent political economy literature helps explaining variation in governance, competition, funding composition and access to credit. Evolution in political institutions can account for financial evolution, and appear critical to explain rapid changes in financial structure, such as the Great Reversal in the early XX century, unlike time-invariant legal institutions or cultural traits. Future research should model the sources and consequences of financial instability, and to predict how major redistributive shocks will shape regulatory choices and financial governance. |
| Keywords: | political institutions, property rights, investor protection, financial development, access to finance, entry, banking |
| JEL: | G21 G28 G32 P16 |
| Date: | 2013–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013034&r=ban |
| By: | Wilko Bolt; David Humphrey |
| Abstract: | Banks supply payment services that underpin the smooth operation of the economy. To ensure an efficient payment system, it is important to maintain competition among payment service providers, but data available to gauge the degree of competition are quite limited. We propose and implement a frontier- based method to assess relative competition in bank-provided payment services. Billion dollar banks account for around 90 percent of assets in the U.S., and those with around $4 to $7 billion in assets turn out to be both the most and the least competitive in payment services, not the very largest banks. |
| Keywords: | Payment systems ; Competition ; Banks and banking |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-17&r=ban |
| By: | Stefan Arping (University of Amsterdam) |
| Abstract: | In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates. |
| Keywords: | Banking Competition, Soft Budget Constraint Problem, Moral Hazard |
| JEL: | G2 G3 |
| Date: | 2012–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012146&r=ban |
| By: | Sweder van Wijnbergen (University of Amsterdam); Timotej Homar (University of Amsterdam) |
| Abstract: | Systemic banking crises often continue into recessions with large output losses (Reinhart & Rogoff 2009a). In this paper we ask whether the way Governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank restructuring provide banks with incentives to restructure bad loans and free up resources for new economic activity. Other interventions lead banks to roll over bad loans, tying up resources in distressed firms. Our analysis suggests that zombie banks are a drag on economic recovery. We then analyze 65 systemic banking crises from the period 1980-2012, of which 25 are part of the recent global financial crisis, to answer the question: how effective are intervention measures from the macro perspective, in particular how do they affect recession duration? We find that bank restructuring, which includes bank recapitalizations, significantly reduces recession duration. The effect of liquidity support on the probability of recovery is positive but smaller. Blanket guarantees on bank liabilities and monetary policy do not have a significant effect. |
| Keywords: | Financial crises, intervention policies, zombie banks, economic recovery, bank restructuring, bank recapitalization |
| JEL: | E44 E58 G21 G28 |
| Date: | 2013–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013039&r=ban |
| By: | Martin Koudstaal (Double Effect); Sweder van Wijnbergen (University of Amsterdam) |
| Abstract: | This paper deals with the relation between excessive risk taking and capital structure in banks. Examining a quarterly dataset of U.S. banks between 1993 and 2010, we find that equity is valued higher when more risky portfolios are chosen when leverage is high, and that more risk taking has a negative impact on valuation of the debt of highly leveraged banks. We find no evidence that deposit insurance is encouraging risk taking behaviour. We do find that banks with a more troubled loan portfolio take on more risk. Banks whose share price has slumped tend to gamble for resurrection by increasing the riskiness of their asset portfolios. The results suggest that incentives embedded in the capital structure of banks contribute to systemic fragility, and so support the Basel III proposals towards less leverage and higher loss absorption capacity of capital. |
| Keywords: | bank fragility, risk shifting, deposit insurance, gambles for resurrection |
| JEL: | G21 G28 G32 |
| Date: | 2012–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012022&r=ban |
| By: | Andre Lucas (VU University Amsterdam); Bernd Schwaab (European Central Bank, Financial Markets Research); Xin Zhang (VU University Amsterdam, and Sveriges Riksbank, Research Division) |
| Abstract: | Two new measures for financial systemic risk are computed based on the time-varying conditional and unconditional probability of simultaneous failures of several financial institutions. These risk measures are derived from a multivariate model that allows for skewed and heavy-tailed changes in the market value of financial firms’ equity. Our model can be interpreted as a Merton model with correlated Levy drivers. This model incorporates dynamic volatilities and dependence measures and uses the overall information on the shape of the multivariate distribution. Our correlation estimates are robust against possible outliers and influential observations. For very large cross-sectional dimensions, we propose an approximation based on a conditional Law of Large Numbers to compute extreme joint default probabilities. We apply the model to assess the risk of joint financial firm failure in the European Union during the financial crisis. By augmenting the dynamic parameter model with Euribor-EONIA rate and other variables that capture situations of systemic stress, we find that including extra economic variables helps to explain systemic correlation dynamics. |
| Keywords: | systemic risk; dynamic equicorrelation model; generalized hyperbolic distribution; Law of Large Numbers |
| JEL: | G21 C32 |
| Date: | 2013–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130063&r=ban |
| By: | Viral V. Acharya; Sascha Steffen |
| Abstract: | We show that Eurozone bank risks during 2007-2012 can be understood as a “carry trade” behavior. Bank equity returns load positively on peripheral (Greece, Ireland, Portugal, Spain and Italy, or GIPSI) bond returns and negatively on German government bond returns, a position that generated “carry” until the deteriorating GIPSI bond returns inflicted losses on banks. The positive GIPSI loadings correlate with banks’ holdings of GIPSI bonds; and, the negative German loading with banks’ short-term debt exposures. Consistent with moral hazard in the form of risk-taking by large, under-capitalized banks to exploit government guarantees, arbitrage regulatory risk weights, and access central-bank funding, we find that this carry-trade behavior is stronger for large banks, and banks with low Tier 1 ratios and high risk-weighted assets, in both GIPSI and non-GIPSI countries’ banks, but not so for similar banks in other Western economies or for non-bank firms. |
| JEL: | F3 G01 G14 G15 G21 G28 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19039&r=ban |
| By: | Lucyna Gornicka (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam) |
| Abstract: | We investigate actual capital chosen by banks in presence of capital minimum requirements and ex-post penalties for violating them. The model yields excess capital that is always positive and increases during times of distress in the economy, which is in line with empirical evidence. Next, we show that in presence of ex-post violation penalties the introduction of the conservation buffer under Basel III will not contribute to lowering the pro-cyclicality of capital regulations. The countercyclical buffer proposed under Basel III is then even more desirable as it significantly attenuates fluctuations of actual capital also when the penalties are accounted for. |
| Keywords: | capital requirements, Basel regulatory framework, excess capital, countercyclical buffer, market discipline |
| JEL: | G21 G28 E32 E44 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013013&r=ban |
| By: | Michael McAleer (Erasmus University Rotterdam); Juan-Ángel Jiménez-Martín (Complutense University of Madrid); Teodosio Pérez-Amaral (Complutense University of Madrid) |
| Abstract: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index. |
| Keywords: | Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel Accord, global financial crisis |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2013–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013010&r=ban |
| By: | Masagus M. Ridhwan (VU University Amsterdam); Henri L.F. de Groot (VU University Amsterdam); Piet Rietveld (VU University Amsterdam); Peter Nijkamp (VU University Amsterdam) |
| Abstract: | This paper explores the determinants of regional differences in interest rates based on a simple theoretical model of loan pricing. The model demonstrates how risks, costs, market concentration and scale economies jointly determine the bank's interest rates. Using recent data of the Indonesian local credit markets, we find that regional interest rate variations are positive and significantly affected by the banks' risk factor, the operating costs, and market concentration. Scale economies negatively affect the interest rates. These findings help to explain geographical segmentation in loan markets. |
| Keywords: | regional capital mobility, loan pricing, interest rates, Indonesia |
| JEL: | R51 E43 C33 |
| Date: | 2012–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012073&r=ban |
| By: | Arnoud W.A. Boot (University of Amsterdam); Lev Ratnovski (IMF) |
| Abstract: | We study the effects of a bank’s engagement in trading. Traditional banking is relationship-based: not scalable, long-term oriented, with high implicit capital, and low risk (thanks to the law of large numbers). Trading is transactions-based: scalable, short-term, capital constrained, and with the ability to generate risk from concentrated positions. When a bank engages in trading, it can use its 'spare' capital to profitably expand the scale of trading. However there are two inefficiencies. A bank may allocate too much capital to trading ex-post, compromising the incentives to build relationships ex-ante. And a bank may use trading for risk-shifting. Financial development augments the scalability of trading, which initially benefits conglomeration, but beyond some point inefficiencies dominate. The deepening of financial markets in recent decades leads trading in banks to become increasingly risky, so that problems in managing and regulating trading in banks will persist for the foreseeable future. The analysis has implications for capital regulation, subsidiarization, and scope and scale restrictions in banking. |
| Date: | 2012–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012107&r=ban |
| By: | Dirk Schoenmaker (Duisenberg School of Finance, VU University Amsterdam); Arjen Siegmann (VU University Amsterdam) |
| Abstract: | Cross‐border banking needs cross‐border recapitalisation mechanisms. Each mechanism, however, suffers from the financial trilemma, which is that cross‐border banking, national financial autonomy and financial stability are incompatible. In this paper, we study the efficiency of different burdensharing agreements for the recapitalisation of the 30 largest banks in Europe. We consider bank bailouts for these banks in a simulation framework with stochastic country‐specific bailout benefits. Among the burden sharing rules, we find that the majority and qualified‐majority voting rules come close to the efficiency of a bailout mechanism with a supranational authority. Even a unanimous voting rule works better than home‐country bailouts, which are very inefficient. |
| Keywords: | Financial Stability, Public Good, International Monetary Arrangements, International |
| JEL: | F33 G28 H41 |
| Date: | 2012–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012111&r=ban |
| By: | Mardi Dungey (School of Economics and Finance, University of Tasmania; CFAP University of Cambridge, CAMA ANU); Matteo Luciani (ECARES, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles; F.R.S.-FNRS); David Veredas (ECARES, Solvay Brussels School of Economics and Management, and Duisenberg school of finance) |
| Abstract: | We propose a simple network–based methodology for ranking systemically important financial institutions. We view the risks of firms –including both the financial sector and the real economy– as a network with nodes representing the volatility shocks. The metric for the connections of the nodes is the correlation between these shocks. Daily dynamic centrality measures allow us to rank firms in terms of risk connectedness and firm characteristics. We present a general systemic risk index for the financial sector. Results from applying this approach to all firms in the S&P500 for 2003–2011 are twofold. First, Bank of America, JP Morgan and Wells Fargo are consistently in the top 10 throughout the sample. Citigroup and Lehman Brothers also were consistently in the top 10 up to late 2008. At the end of the sample, insurance firms emerge as systemic. Second, the systemic risk in the financial sector built–up from early 2005, peaked in September 2008, and greatly reduced after the introduction of TARP and the rescue of AIG. Anxiety about European debt markets saw the systemic risk begin to rise again from April 2010. We further decompose these results to find that the systemic risk of insurance and deposit– taking institutions differs importantly, the latter experienced a decline from late 2007, in line with the burst of the housing price bubble, while the former continued to climb up to the rescue of AIG. |
| Keywords: | Systemic risk, ranking, financial institutions, Lehman |
| JEL: | G01 G10 G18 G20 G28 G32 G38 |
| Date: | 2012–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012115&r=ban |
| By: | Stefan Arping (University of Amsterdam) |
| Abstract: | We embed proprietary trading into a model of bank lending. Opportunities to engage in purely speculative trading can harm the real economy. This is because banks, when devoting cheap but scarce deposits to lending rather than to gambling, must be compensated for giving up gambling rents. This makes corporate loans more costly, stifling real economic activity. Worse, gambling can crowd out lending, forcing firms to seek costly bond financing. By contrast, when trading is required for the provision of complementary banking services, banks may actually engage in too <I>little</I> trading. Ring-fencing trading can facilitate the efficient provision of banking services. |
| Keywords: | Proprietary Trading, Volcker Rule, Disintermediation, Shadow Banking, Depositor Preference, Safe Harbors, Covered Bonds, Ring-fencing, Financial Stability |
| JEL: | G2 G3 |
| Date: | 2013–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013032&r=ban |
| By: | Stefan Arping (University of Amsterdam) |
| Abstract: | We examine the impact CDS protection on lending relationships and efficiency. CDS insulate lenders against losses from forcing borrowers into default and liquidation. This improves the credibility of foreclosure threats, which can have positive implications for borrower incentives and credit availability ex ante. However, lenders may also abuse their enhanced bargaining power vis-a-vis borrowers and extract additional surplus in debt renegotiations. If this hold up threat becomes severe, borrowers will be reluctant to agree to debt maturity designs or control right transfers that would have been optimal in the absence of CDS protection. The introduction of CDS markets may then ultimately tighten credit constraints and be detrimental to welfare. |
| Keywords: | Corporate Lending; Financial Innovation; Credit Default Swaps; Credit Derivatives; Credit Risk Transfer; Empty Creditor Problem |
| JEL: | G2 G3 |
| Date: | 2012–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012142&r=ban |
| By: | Christiaan van der Kwaak (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam) |
| Abstract: | We analyze the interaction between bank rescues, financial fragility and sovereign debt discounts. We construct a model that contains balance sheet constrained financial intermediaries financing both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face the risk of a (partial) default of the government on its debt obligations. We analyse the impact of a financial crisis, first under full government credibility and then with an endogenous sovereign debt discount. The introduction of the default possibility does not have any impact IF all government debt is short term. Interest rates on debt reflect higher default probabilities, but because all debt is short term, bank balance sheets are unaffected and no further negative effects arise through the endogenous sovereign debt channel. But once long term government debt is introduced, the possibility of capital losses on bank balance sheets arises. Then o utcomes significantly deteriorate compared to the short term debt only case. Higher interest rates on new debt lead to capital losses on banks' holding of existing long term government debt. The associated increase in credit tightness leads to a negative amplification effect, significantly increasing output losses and declines in investment after a financial crisis. This causes potentially conflicting macroeconomic effects of a debt financed recapitalization of banks. We investigate the case where the government announces a bankrecapitalization to occur 4 quarters after announcement. Under the parameter values chosen, the positive effects from an anticipated capital injection dominate the effects of the associated increase in sovereign default risk. |
| Keywords: | Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk |
| JEL: | E44 E62 H30 |
| Date: | 2013–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013052&r=ban |
| By: | Dirk Schoenmaker (Duisenberg School of Finance); Arjen Siegmann (VU University Amsterdam) |
| Abstract: | An anticipated benefit of the prospective European Banking Union is stronger supervision of European banks. Another benefit would be enhanced resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority would follow a supranational approach, under which domestic and cross-border effects within Europe are incorporated. Using a model of recapitalising banks, this paper develops indicators to measure the efficiency improvement of resolution. Next, these efficiency indicators are applied to the hypothetical resolution of the top 25 European banks, which count for the vast majority of cross-border banking in Europe. Our cost-benefit analysis indicates that the UK, Spain, Sweden, and the Netherlands are the main beneficiaries and thus have the largest economic incentives to join Europe’s Banking Union. |
| Keywords: | Financial Stability, Financial Crises, Public Good, International Banking |
| JEL: | F33 G01 G28 H41 |
| Date: | 2013–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013026&r=ban |
| By: | Natalya Martynova (University of Amsterdam); Enrico Perotti (University of Amsterdam) |
| Abstract: | We study the effect of going-concern contingent capital on bank risk choice. The possibility of debt for equity conversion forces deleveraging in highly levered states, when risk incentives are worse. The additional equity reduces endogenous risk shifting by diluting returns in high states. An optimally designed trigger and convertible debt amount trades off this risk reduction against its debt dilution effect. Interestingly, contingent capital may be less risky in equilibrium than traditional debt, as its lower priority is compensated by reduced endogenous risk. Its effectiveness in risk reduction depends critically on the informativeness of the trigger. Adopting a noisy market trigger produces excess conversion (type II error), while an accounting trigger converts too infrequently (type I error) because of regulatory forbearance. |
| Keywords: | Risk shifting; Financial Leverage; Contingent Capital |
| JEL: | G13 G21 G28 |
| Date: | 2012–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012106&r=ban |
| By: | Andre Lucas (VU University Amsterdam, and Duisenberg school of finance); Bastiaan Verhoef (Royal Bank of Scotland) |
| Abstract: | We investigate the effect of model specification on the aggregation of (correlated) market and credit risk. We focus on the functional form linking systematic credit risk drivers to default probabilities. Examples include the normal based probit link function for typical structural models, or the exponential (Poisson) link function for typical reduced form models. We first show analytically how model specification impacts 'diversification benefits' for aggregated market and credit risk. The specification effect can lead to Value-at-Risk (VaR) reductions in the range of 3 percent to 47 percent, particularly at high confidence level VaRs. We also illustrate the effects using a fully calibrated empirical model for US data. The empirical effects corroborate our analytic results. |
| Keywords: | risk aggregation, credit risk, market risk, link function, diversification, reduced form models, structural models |
| JEL: | G32 G21 C58 |
| Date: | 2012–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012057&r=ban |
| By: | Keyra Primus |
| Abstract: | This paper examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve requirements is successful in sterilizing excess reserves, it creates a procyclical effect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess reserves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:183&r=ban |
| By: | Patrick Bayer; Fernando Ferreira; Stephen Ross |
| Abstract: | This paper examines mortgage outcomes for a large, representative sample of individual home purchases and refinances linked to credit scores in seven major US markets in the recent housing boom and bust. Among those with similar credit scores, black and Hispanic homeowners had much higher rates of delinquency and default in the downturn. These differences are not readily explained by the likelihood of receiving a subprime loan or by differential exposure to local shocks in the housing and labor market and are especially pronounced for loans originated near the peak of the boom. Our findings suggest that those black and Hispanic homeowners drawn into the market near the peak were especially vulnerable to adverse economic shocks and raise serious concerns about homeownership as a mechanism for reducing racial disparities in wealth. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:13-7&r=ban |
| By: | Pushkar Maitra; Sandip Mitra; Dilip Mookherjee; Alberto Motta; Sujata Visaria |
| Abstract: | We study trader agent intermediated lending (TRAIL), a new version of microfinance where local intermediaries (lenders) are appointed as agents to recommend borrowers for individual liability loans designed to allow the financing of agricultural operations. The scheme involves no peer monitoring, group meetings or savings requirements. In a randomized evaluation conducted in West Bengal, India, TRAIL loans have higher take-up rates and higher repayment rates than traditional group-based joint liability loans. This can be explained by a model of segmented informal credit markets with adverse selection, in which repayment-based commissions deter collusion and motivate agents to recommend low-risk borrowers. |
| Keywords: | Microfinance, Agent Based Lending, Group Lending, Selection, Takeup, Repayment |
| JEL: | D82 O16 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2013-16&r=ban |
| By: | Valentina Bruno; Hyun Song Shin |
| Abstract: | We investigate global factors associated with cross-border capital flows. We formulate a model of gross capital flows through the international banking system and derive a closed form solution that highlights the leverage cycle of global banks as being a prime determinant of the transmission of financial conditions across borders. We then test the predictions of our model in a panel study of 46 countries and find that global factors dominate local factors as determinants of banking sector capital flows. |
| JEL: | F32 F34 F36 G21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19038&r=ban |
| By: | Markus Kirchner (Central Bank of Chile); Sweder van Wijnbergen (University of Amsterdam) |
| Abstract: | Recent macro developments in the euro area have highlighted the interactions between fiscal policy, sovereign debt, and financial fragility. We take a structural macroeconomic model with frictions in the financial intermediation process, in line with recent research, but introduce asset choice and sovereign debt holdings in the portfolio of banks. Using this model, we emphasize a new crowding-out mechanism that works through reduced private access to credit when banks accumulate sovereign debt under a leverage constraint. Our results show that, when banks invest a substantial fraction of their assets in sovereign debt, the effectiveness of fiscal stimulus policies may be impaired because deficit-financed fiscal expansions may tighten financial conditions to such an extent that private demand is crowded out. We also analyze the macroeconomic effectiveness of liquidity support to commercial banks through recapitalizations or loans by the government and the impact of different ways of financing those policies. |
| Keywords: | Financial intermediation; Fiscal policy; Sovereign debt |
| JEL: | E44 E62 H30 |
| Date: | 2012–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012044&r=ban |
| By: | V.V. Chari; Patrick J. Kehoe |
| Abstract: | We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of limits on the debt-to-value ratio of firms mitigates the time-inconsistency problem by eliminating the incentives of governments to undertake bailouts. In terms of the cyclical properties of regulation, we show that regulation should be tightest in ag-gregate states in which resources lost to bankruptcy in the equilibrium without a government are largest. |
| Keywords: | Regulation |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:481&r=ban |
| By: | Benjamin Chabot; Charles C. Moul |
| Abstract: | Governments often attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility. Confidence in these guarantees presumably alters the size of the financial sector, but observing the long-run consequences of failed guarantees is difficult in the modern era. We look to America’s free-banking era and compare the consequences of a broken guarantee during the Indiana-centered Panic of 1854 to the Panic of 1857 in which guarantees were honored. Our estimates of a model of endogenous market structure indicate substantial negative long-run consequences to financial depth when panics cast doubt upon a government’s ability to honor its guarantees. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2013-03&r=ban |
| By: | Lukasz Gatarek (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam); Lennart Hoogerheide (VU University Amsterdam); Koen Hooning (Delft University of Technology); Herman K. van Dijk (Econometric Institute, Erasmus University Rotterdam, and VU University Amsterdam) |
| Abstract: | Accurate prediction of risk measures such as Value at Risk (VaR) and Expected Shortfall (ES) requires precise estimation of the tail of the predictive distribution. Two novel concepts are introduced that offer a specific focus on this part of the predictive density: the censored posterior, a posterior in which the likelihood is replaced by the censored likelihood; and the censored predictive likelihood, which is used for Bayesian Model Averaging. We perform extensive experiments involving simulated and empirical data. Our results show the ability of these new approaches to outperform the standard posterior and traditional Bayesian Model Averaging techniques in applications of Value-at-Risk prediction in GARCH models. |
| Keywords: | censored likelihood, censored posterior, censored predictive likelihood, Bayesian Model Averaging, Value at Risk, Metropolis-Hastings algorithm. |
| JEL: | C11 C15 C22 C51 C53 C58 G17 |
| Date: | 2013–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013060&r=ban |
| By: | Sumit Agarwal; Richard J. Rosen; Vincent Yao |
| Abstract: | Refinancing a mortgage is often one of the biggest and most important financial decisions that people make. Borrowers need to choose the interest rate differential at which to refinance and, when that differential is reached, they need to take the steps to refinance before rates change again. The optimal differential is where the interest saved by refinancing equals the sum of refinancing costs and the option value of refinancing. Using a unique panel data set, we find that approximately 59% of borrowers refinance sub-optimally – with 52% of the sample making errors of commission (choosing the wrong rate), 17% making errors of omission (waiting too long to refinance), and 10% making both errors. Financially sophisticated borrowers make smaller mistakes, refinancing at rates closer to the optimal rate and waiting less after mortgage rates reach the borrowers’ trigger rates. Evidence suggests borrowers learn from their refinancing experiences as they make smaller mistakes on their second refinancing than on their first one. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2013-02&r=ban |
| By: | Mahmoud Elamin |
| Abstract: | I show, under intuitive conditions on the risk-averse utility function, the nonoptimality of the Diamond and Dybvig (1983) contract in the Goldstein and Pauzner (2005) environment. If marginal utility at zero is low enough, then Goldstein and Pauzner (2005)’s claim about the optimality of the Diamond and Dybvig (1983) contract is true. When it is not, the optimal contract insures the patient depositor against a project default. The contract may exhibit risk-sharing with the impatient depositor. Unlike when Goldstein and Pauzner (2005)’s claim is correct, relative risk aversion greater than 1 does not necessarily make the optimal bank contract run-prone. I present a condition under which it is. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1306&r=ban |
| By: | Chia-Lin Chang (National Chung Hsing University, Taiwan); David Allen (Edith Cowan University, Australia); Michael McAleer (Erasmus University Rotterdam, Complutense University of Madrid, Spain; Kyoto University, Japan) |
| Abstract: | Research papers in empirical finance and financial econometrics are among the most widely cited, downloaded and viewed articles in the discipline of Finance. The special issue presents several papers by leading scholars in the field on “Recent Developments in Financial Economics and Econometrics”. The breadth of coverage is substantial, and includes original research and comprehensive review papers on theoretical, empirical and numerical topics in Financial Economics and Econometrics by leading researchers in finance, financial economics, financial econometrics and financial statistics. The purpose of this special issue on “Recent Developments in Financial Economics and Econometrics” is to highlight several novel and significant developments in financial economics and financial econometrics, specifically dynamic price integration in the global gold market, a conditional single index model with local covariates for detecting and evaluating active management, whether the Basel Accord has improved risk management during the global financial crisis, the role of banking regulation in an economy under credit risk and liquidity shock, separating information maximum likelihood estimation of the integrated volatility and covariance with micro-market noise, stress testing correlation matrices for risk management, whether bank relationship matters for corporate risk taking, with evidence from listed firms in Taiwan, pricing options on stocks denominated in different currencies, with theory and illustrations, EVT and tail-risk modelling, with evidence from market indices and volatility series, the economics of data using simple model free volatility in a high frequency world, arbitrage-free implied volatility surfaces for options on single stock futures, the non-uniform pricing effect of employee stock options using quantile regression, nonlinear dynamics and recurrence plots for detecting financial crisis, how news sentiment impacts asset volatility, with evidence from long memory and regime-switching approaches, quantitative evaluation of contingent capital and its applications, high quantiles estimation with Quasi-PORT and DPOT, with an application to value-at-risk for financial variables, evaluating inflation targeting based on the distribution of inflation and inflation volatility, the size effects of volatility spillovers for firm performance and exchange rates in tourism, forecasting volatility with the realized range in the presence of noise and non-trading, using CARRX models to study factors affecting the volatilities of Asian equity markets, deciphering the Libor and Euribor spreads during the subprime crisis, information transmission between sovereign debt CDS and other financial factors for Latin America, time-varying mixture GARCH models and asymmetric volatility, and diagnostic checking for non-stationary ARMA models with an application to financial data. |
| Keywords: | Dynamic price integration, local covariates, risk management, global financial crisis, credit risk, liquidity shock, micro-market noise, corporate risk taking, options, volatility, quantiles, news sentiment, contingent capital, value-at-risk (see paper) |
| JEL: | G11 G12 G13 G15 G18 |
| Date: | 2013–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013021&r=ban |