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on Regulation |
| By: | Franklin Allen; Elena Carletti |
| Abstract: | This paper identifies two types of market failures. The first concerns a coordination problem associated with panics. The problem in analysing this type of market failure from a policy perspective is that there is no widely accepted method for selecting equilibria. The second market failure concerns the incompleteness of financial markets. The essential problem here is that the incentives to provide liquidity lead to an inefficient allocation of resources. The paper outlines three manifestations of market failure associated with liquidity provision: financial fragility, contagion and asset price bubbles. The framework developed allows some insight into the question of when the financial system acts a shock absorber and when it acts as an amplifier. Having identified when there is a market failure, the paper looks at whether there are policies that can correct the undesirable effects of such failures. |
| Keywords: | bank regulation, financial crisis, financial intermediation, market failure |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:257&r=reg |
| By: | Guglielmo Barone (Bank of Italy, Economic Research Unit, Bologna Main Branch); Federico Cingano (Bank of Italy, Research Department) |
| Abstract: | We study the effects of anti-competitive service regulation by examining whether OECD countries with less anti-competitive regulation see a better economic performance of manufacturing industries using less-regulated services more intensively. Our results indicate that lower service regulation translates into faster value added, productivity, and export growth of downstream service-intensive industries. The negative growth-effect of anti-competitive regulation is particularly relevant in the case of professional services and energy provision. Our estimates prove robust to accounting for alternative forms of regulation (such as product and labor market regulation), for the degree of financial development and also to a number of other specification checks. |
| Keywords: | Regulation, financial development, sector analysis, growth |
| JEL: | O40 L51 L80 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_675_08&r=reg |
| By: | Juri Marcucci (Bank of Italy, Economic Research Department); Mario Quagliariello (Bank of Italy, Banking and Financial Supervision) |
| Abstract: | In the recent banking literature on the relationship between credit risk and the business cycle, the presence of asymmetric effects both across credit risk regimes and through the business cycle has been generally neglected. Employing threshold regression models both at the aggregate and the bank level and exploiting a unique dataset on Italian bank borrowersÂ’ default rates, this paper analyzes whether this relationship is characterized by regime switches and thus by asymmetries, determining the thresholds endogenously. Our results show that not only are the effects of the business cycle on credit risk more pronounced during downturns but also when credit risk conditions are poor. |
| Keywords: | Credit Risk, Panel Threshold Regression Models, Regime Switching, Default Rate, Business Cycle, Cyclicality, Basel 2 |
| JEL: | C22 C23 G21 G28 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_670_08&r=reg |
| By: | Heng, Stefan |
| Abstract: | The introduction of sector-specific regulation in the EU has fostered competition and innovation in the telecommunications industry. However, the liberalisation process still has a long way to go. The debate on the new scenario facing European telecoms regulators shows that as far as the institutional (centralised or decentralised) and time-related (ex-post or ex-ante) focus is concerned, a clear policy line is required. Politically motivated delays and ensuing uncertainties in the market must be avoided in order to boost innovation and achieve sustainable competition. |
| Keywords: | regulation; telecommunications; EU; fixed line telephony |
| JEL: | K2 L96 O33 O14 |
| Date: | 2008–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9718&r=reg |
| By: | Rod Tyers |
| Abstract: | China’s industrial reforms have left many key industries dominated by single or small numbers of firms, most of which remain state owned. Until recently, these firms have not been required to pay dividends to the state and the recent surge in China’s growth has made them very profitable, with their economic profits adding 20% of GDP to corporate saving. This bolsters the overall saving-investment gap and hence China’s controversial current account surplus. In other countries, oligopolistic industries tend to be taxed more heavily and they are commonly subjected to price regulation. This study offers an economy-wide analysis of approaches to oligopoly rents in China. The results suggest that, while policy changes targeting national saving, including increased corporate taxation, expansionary fiscal policy and SOE privatisation all help to control the external imbalance, they tend also to turn demand inward, inducing higher oligopoly rents and slower growth. Competition policy, embodying both price cap regulation and free entry, proves more effective both in controlling the external imbalance and in fostering continued growth. |
| JEL: | D43 D58 F32 L13 L43 L51 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-21&r=reg |
| By: | Erik Buyst (University of Leuven); Ivo Maes (National Bank of Belgium, Robert Triffin Chair, Universite catholique de Louvain, and University of Leuven.) |
| Abstract: | This paper provides an overview of the regulation and supervision of the Belgian financial system from the creation of Belgium in 1830 to the early 21st century. After severe crises, the National Bank of Belgium was created in 1850. The Great Depression led to further reforms, increasing the role of the government, especially through the establishment of the Banking Commission. In the post-war period, reforms were driven by changes in the financial landscape, especially an increasing role for market forces. In line with the despecialisation process, the responsibilities of the Banking Commission were gradually extended, becoming, in 2004, the Banking, Finance and Insurance Commission. Moreover, at the turn of the millennium, the role of the NBB in financial stability matters was enhanced. |
| Keywords: | Financial regulation; Financial supervision; Belgium |
| JEL: | G18 N23 N44 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:77&r=reg |
| By: | Meghan McGuinness; A. Denny Ellerman |
| Abstract: | In the absence of a federal policy to cap carbon emissions many states are moving forward with their own initiatives, which currently range from announcements of commitments to reduce greenhouse gases to a regional multi-state cap-and-trade program slated to begin in 2009. While federal legislation is expected in the next few years, it is unclear how such legislation will define the relationship between a federal cap and trade program and other state regulations. Assuming the introduction of a cap-and-trade program at the federal level, this paper analyzes the economic and environmental impacts of the range of possible interactions between the federal program and state programs. We find that the impacts of interaction depend on relative stringency of the federal and state program and overlap in source coverage. Where state programs are both duplicative of and more demanding than the federal cap, the effect is entirely redistributive of costs and emissions, with in-state sources facing higher marginal abatement costs. Also, differing marginal abatement costs among states create economic inefficiencies that make achievement of the climate goal more costly than it need be. These redistributive effects and the associated economic inefficiency are avoided under either federal preemption of duplicative state programs or a ‘carve out’ of state programs from the federal cap with linkage to the federal allowance market. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:mee:wpaper:0804&r=reg |
| By: | VILLENEUVE, BERTRAND; ZHANG, VANESSA YANHUA |
| Abstract: | We analyze the trade-off faced by competition authorities envisaging a one-shot structural reform in a capitalistic industry. A structure is (1) a sharing of productive capital at some time and (2) a sharing of sites or any other non-reproducible assets. The latter represent opportunities. These two distinct dimensions of policy illustrate the importance of a dynamic theory in which firms may differ in several respects. Though equalization of endowments and rights is theoretically optimal, realistic constraints force competition authorities to adopt second-best solutions. Affirmative action here appears to explain why helping the disadvantaged contributes maximally to social surplus. |
| Keywords: | Competition policy; capacity accumulation; Cournot competition; asymmetric duopoly; regulatory consistency; differential games. |
| JEL: | L13 L40 C73 |
| Date: | 2008–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9700&r=reg |
| By: | Maarten C.W. Janssen; Alexei Parakhonyak |
| Abstract: | This paper analyzes dynamic selection effects that arise in a regulated market where price structures are determined by a regulator or central management. Consumers come in different types where each type requires a different service or treatment. We show that for a large class of price structures some group of customers is refused the service. Equilibria with selection are welfare inferior to equilibria without selection. We also characterize the class of price structures for which selection does not arise. As the number of customers increases or agents become more patient the class of selection-free price structures shrinks and in the limit it is unique. Moreover, all other price structures induce selection. The general model can be applied to a variety of markets, including health care and taxi markets. |
| JEL: | I11 L51 R48 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:0810&r=reg |
| By: | Bannier, Christina E.; Hänsel, Dennis N. |
| Abstract: | We analyze collateralized loan obligation (CLO) transactions by European banks (1997 - 2004), trying to identify firm-specific and macroeconomic factors influencing an institution’s securitization decision. CLO issuance seems to be an appropriate funding tool for large banks with high risk and low liquidity. However, risk transfer turns out to be limited in the extremes. Controlling for fixed effects, we find that fixed costs of securitization are surmountable also for smaller institutions. Interestingly, commercial banks seem to use loan securitization to access capital-market based businesses and the associated fee income. Regulatory capital arbitrage does not appear to have driven the market. Trotz des rasanten Wachstums des Marktes für Kreditrisikotransfer sind die Motive der Banken für die Verbriefung von Kreditportfolios noch nicht vollständig geklärt. Kreditverbriefungen führen zwar zu höherer Liquidität, einer Reduktion von Kredit- und Zinsrisiken, einer Steigerung von Provisionseinkommen, möglicherweise auch einer Verbesserung der Kapitalstruktur, jedoch entscheiden sich einige Banken trotzdem gegen eine Strukturierung und Weiterreichung ihrer Kreditportfolios. Unter den Nachteilen der Verbriefung werden unter anderem die relativ hohen fixen Kosten der erstmaligen Errichtung einer Verbriefungsstruktur sowie eventuelle Steuernachteile von nicht auf der Bilanz gehaltenen Krediten genannt. Weiterhin ermöglicht das neue Basel-II Regelwerk keine „Arbitrage regulatorischen Eigenkapitals“ via Kreditverbriefung mehr, anders als die weniger risikosensitive Eigenkapitalunterlegung unter den alten Basel-Richtlinien. Unsere Studie analysiert „Collateralized Loan Obligation“ (CLO) Transaktionen von Europäischen Banken in den Jahren 1997-2004. Ziel ist es, Faktoren zu isolieren, die die Entscheidung einer Bank, Kredite zu verbriefen, beeinflusst haben. Während wir einen Einfluss regulatorischer Arbitrage nicht vollkommen ausschließen können, zeigt unsere Studie, dass die wesentlichen Bestimmungsfaktoren vielmehr individuelle Faktoren der Banken sind. So ist die Wahrscheinlichkeit, dass eine Bank Kredite verbrieft, umso höher, je größer die Bank, je geringer ihre Liquidität und je höher ihr erwartetes Kreditrisiko ist. Kreditverbriefungen werden offensichtlich als Möglichkeit des Kreditrisikotransfers genutzt. Allerdings zeigt sich, dass Banken mit dem höchsten Kreditrisiko ihre Verbriefungsaktivitäten mit zunehmendem Risiko einstellen, so dass die Risikotransferfunktion nur begrenzt zu nutzen zu sein scheint. Für am Aktienmarkt notierte Banken treffen obige Aussagen noch stärker zu. Interessanterweise zeigt sich hier sogar ein „negativer“ regulatorischer Arbitrageeffekt : Banken mit niedrigem regulatorischem Eigenkapital verbriefen weniger Kredite als Banken mit höherem Eigenkapital. Die neuen Eigenkapitalrichtlinien nach Basel II sollten daher das zukünftige Wachstum des Kreditrisikotransfermarktes nicht beeinträchtigen. Bemerkenswerterweise scheint auch die Bankengröße eine weniger wichtige Rolle zu spielen als zunächst gedacht. Auch kleinere Banken sind somit in der Lage, die mit einer Kreditverbriefung verbundenen Fixkosten zu tragen. Es ist zu vermuten, dass gerade traditionelle Kreditbanken die Verbriefung von Kreditportfolios unter anderem auch nutzen, um indirekt dem „investment-banking“ verwandte Geschäftsbereiche und die entsprechenden Provisionseinkommen zu erschließen. |
| Keywords: | Securitization, credit risk transfer, collateralized loan obligations |
| JEL: | G21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:7320&r=reg |
| By: | Régis Blazy (CREFI-LSF, University of Luxembourg); Gisèle Umbhauer; Laurent Weill |
| Abstract: | This research investigates how the legal sanctions prevailing under bankruptcy code impact on the design of debt contacts. Unlike most papers considering a passive behavior of the bank in case of default of the borrower, we assume the bank actively trades off between private renegotiation and costly bankruptcy procedure. Besides, the debtor’s investment policy – with a risk of asset substitution – and the creditor’s financial policy – endogenous interest rate – are explicitly modeled. The model focuses on three possible equilibriums. The first one encompasses situations where the firms stay with the best investment project (economic efficiency) and bankruptcy costs are avoided through private renegotiation (legal efficiency): this equilibrium requires a condition on bankruptcy costs and is independent of legal sanctions. A second equilibrium cover situations where the firms turn to the less profitable and riskiest project (economic inefficiency) and the default is still privately solved (legal efficiency): to avoid suboptimal investment, a minimal level of legal sanctions, whose threshold value depends on the interest rate, must apply. Last, we consider mixed strategies on the investment policy (partial economic efficiency): when financial distress occurs, two bargaining equilibriums prevail – pooling or separating – so costly bankruptcy may apply (legal inefficiency). Simulated results illustrate how the bank finally chooses between these equilibriums while the legal environment becomes more severe. First, as expected, when sanctions are getting higher, the probability of choosing the best project increases: simulations provide minimal levels of sanctions which guarantee the occurrence of the best equilibrium. As a result, extreme severity is not needed to ensure both economic and legal efficiency. Second, an increase of legal sanctions is likely to reduce the contractual interest rate, as the bank is more protected by the law, and cannot charge a risk premium anymore. A noteworthy consequence is that the debtor benefits in some extent of increased severity, as he is inclined to invest in the most profitable projects and, consequently, pays a lower interest rate. Third, a slight change of the legal environment may involve a drastic adjustment of financial variables, so that small changes in the law may involve financial instability. |
| Keywords: | Bankruptcy, Credit Lending, Interest Rate, Moral Hazard, Legal Sanctions |
| JEL: | G33 D82 D21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:08-04&r=reg |
| By: | Michelle J. White; Ning Zhu |
| Abstract: | This paper examines how filing for bankruptcy under Chapter 13 helps financially distressed debtors save their homes. Filing under Chapter 13 stops lenders from foreclosing and gives debtors extra time to repay mortgage arrears, but does not reduce the total amount owed. We develop a model of debtors' decisions to default on their mortgages and file for bankruptcy and we evaluate it using a new dataset of debtors who filed for bankruptcy under Chapter 13 in 2006. We also examine the effect of allowing "strip-down" of residential mortgages in Chapter 13, so that bankruptcy judges could reduce the total amount owed. The paper documents that 96% of Chapter 13 filers are homeowners and that more than 90% of Chapter 13 plans involve repayment of mortgages or car loans. The model predicts that introducing strip-down would allow an additional 100,000 debtors to save their homes each year. |
| JEL: | G33 G38 K35 R31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14179&r=reg |