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on Regulation |
| By: | Eric Tymoigne |
| Abstract: | This study analyzes the trends in the financial sector over the past 30 years, and argues that unsupervised financial innovations and lenient government regulation are at the root of the current financial crisis and recession. Combined with a long period of economic expansion during which default rates were stable and low, deregulation and unsupervised financial innovations generated incentives to make risky financial decisions. Those decisions were taken because it was the only way for financial institutions to maintain market share and profitability. Thus, rather than putting the blame on individuals, this paper places it on an economic setup that requires the growing use of Ponzi processes during enduring economic expansion, and on a regulatory system that is unwilling to recognize (on the contrary, it contributes to) the intrinsic instability of market mechanisms. Subprime lending, greed, and speculation are merely aspects of the larger mechanisms at work. It is argued that we need to change the way we approach the regulation of financial institutions and look at what has been done in other sectors of the economy, where regulation and supervision are proactive and carefully implemented in order to guarantee the safety of society. The criterion for regulation and supervision should be neither Wall Street's nor Main Street's interests but rather the interests of the socioeconomic system. The latter requires financial stability if it's to raise, durably, the standard of living of both Wall Street and Main Street. Systemic stability, not profits or homeownership, should be the paramount criterion for financial regulation, since systemic stability is required to maintain the profitability--and ultimately, the existence--of any capitalist economic entity. The role of the government is to continually counter the Ponzi tendencies of market mechanisms, even if they are (temporarily) improving standards of living, and to encourage economic agents to develop safe and reliable financial practices. See also, Working Paper No. 573.2, "Securitization, Deregulation, Economic Stability, and Financial Crisis, Part II: Deregulation, the Financial Crisis, and Policy Implications." |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_573_1&r=reg |
| By: | McAleer, M.; Jimenez-Marin, J-. A.; Perez-Amaral, T. (Erasmus Econometric Institute) |
| Abstract: | When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper we illustrate two useful variations to the standard mechanism for choosing forecasts, namely: (i) combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; (ii) alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. We illustrate these points using the Standard and Poor’s 500 Composite Index. In many cases we find significant decreases in the capital requirements, while incurring a number of violations that stays within the Basel II Accord limits. |
| Keywords: | risk management;violations;aggressive risk strategy;conservative risk strategy;value-at-risk forecast |
| Date: | 2009–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureir:1765016512&r=reg |
| By: | Tobias Adrian; Hyun Song Shin |
| Abstract: | The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:382&r=reg |
| By: | Federico Cingano (Bank of Italy); Marco Leonardi (University of Milan); Julián Messina (University of Girona); Giovanni Pica (University of Salerno) |
| Abstract: | This paper analyzes the joint effect of EPL and financial market imperfections on investment, capital-labour substitution, labour productivity and job reallocation in a cross-country framework. In the spirit of Rajan and Zingales (1998) and Ciccone and Papaioannou (2006), we exploit variation in the need for reallocation at the sectoral and aggregate level to assess the average effect of EPL on firms’ policies. Then, exploiting firm-level information we study if the effect of EPL is stronger in firms with lower levels of internal resources. We find that, on average, EPL reduces investment per worker, capital per worker and value added per worker in high reallocation sectors relative to low reallocation sectors. The reduction in the capital-labour ratio is less pronounced in firms with higher internal resources, suggesting that financial constraints exacerbate the negative effects of EPL on capital deepening. |
| Keywords: | capital-labor substitution, labor market imperfections, financial market imperfections |
| JEL: | J21 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0914&r=reg |
| By: | Douhan, Robin (Research Institute of Industrial Economics (IFN)); Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)) |
| Abstract: | What explains the world-wide trend of pro-entrepreneurial policies in the last few decades? We study entrepreneurial policy in a lobbying model taking into account the con.ict of interest between entrepreneurs and incumbents. It is shown that international market integration leads to more pro-entrepreneurial policies. It becomes more difficult to protect the profits of incumbent firms from entrepreneurial entry and pro-entrepreneurial policies make foreign entrepreneurs less aggressive. Making use of the Doing Business database, we find, consistent with our theory, evidence that international openness reduces barriers to entry for new entrepreneurs and that the effect is stronger in countries with more rent-seeking governments. |
| Keywords: | Entrepreneurship; Regulation; Innovation; Market Integration; Lobbying |
| JEL: | D73 F15 L26 L51 O31 |
| Date: | 2009–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0807&r=reg |
| By: | Sharon Belenzon; Tomer Berkovitz; Patrick Bolton |
| Abstract: | This paper examines the relation between ownership, corporate form, and innovation for a cross-section of private and publicly traded innovating firms in the US and 15 European countries. A striking novel observation emerges from our analysis: while most innovating firms in the US are publicly traded conglomerates, a substantial fraction of innovation is concentrated in private firms and in business groups in continental European countries. We find virtually no variation across US industries in the corporate form of innovating firms, but a substantial variation across industries in continental European countries, where business groups tend to be concentrated in industries with a slower and more fundamental innovation cycle and where intellectual protection of innovators seems to be of paramount importance. Our findings suggest that innovative companies choose the corporate form most conducive to R&D, as predicted by the Coasian view of how firms form. This is especially true in Europe, where there are fewer regulatory hurdles to the formation of business groups and hybrid corporate forms. It is less the case in the US, where conglomerates are generally favored. |
| JEL: | O16 O31 O32 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15304&r=reg |
| By: | Blomqvist, Paula (Uppsala University, Department of Government); Larsson, Jakob (Institute for Futures Studies) |
| Abstract: | <p>Health care is an area that remains formally outside the competence of the EU. Despite this, the union’s influence on national health care policies has increased substantially over the past decade. In a series of rulings, the European Court of Justice (ECJ) established a de facto system of patient rights, which, under certain conditions, entitle European citizens to receive health care in other member states at the expense of the social insurance system of their home country. This undermines the autonomy of the member states in the area of health, a key sector in national welfare systems. In 2008, the Commission proposed a new directive on patients’ rights which builds directly on the ECJ rulings, thus consolidating politically the legal precedent set by the Court. The ECJ Court rulings have also spurred the initiation of a so-called OMC process in the area of health care, whereby the member states commit themselves to policy harmonization on a voluntary basis.<p> <p>In this paper, we review the contents of emerging EU policies in the area of health and discuss their implications for the Nordic health care systems. A central question is whether any coherent, common European policy may be discerned and, if so, how it will affect health care systems of the Nordic type, which are tax-based and universalistic in orientation?<p> |
| Keywords: | European Union; Health care; European Court of Justice; Open Method of Coordination |
| JEL: | I11 I18 |
| Date: | 2009–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ifswps:2009_013&r=reg |
| By: | Mayes, David G (Bank of Finland and University of Auckland) |
| Abstract: | The present crisis has revealed that, as expected, much of the safety net for handling failures in the banking system is deficient, particularly for cross-border banks, and the present problems had to be handled by a range of ad hoc measures. The principal new measure that needs to be undertaken in most countries is the implementation of a satisfactory special resolution regime for banks. This paper, however, deals with two further steps that could assist the operation of the safety net. The first is to ensure earlier intervention so there is more time to put a satisfactory rescue or resolution in place. The second is to implement a regime of prompt corrective action (structured early intervention and resolution, SEIR) so that both supervisors and banks know that a regime of increasing intensity will take place according to a strict timetable that will end in the authorities stepping into the bank while it still has positive capital, if the earlier stages are not effective. The paper evaluates the means of doing this in a European environment making use of the experience in the United States. It concludes that, while a lot can be done even within the current framework of national supervision, particularly through pre-positioning, cross-border banks can be better treated either by revising the home-host responsibilities or by moving to a supranational level of responsibility for SEIR for those banks whose continued operation is considered necessary for financial stability in any member state. |
| Keywords: | early intervention; prompt corrective action; cross-border banks; pre-positioning; bank resolution |
| JEL: | E58 F15 F23 G21 G28 G33 |
| Date: | 2009–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_017&r=reg |