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on Regulation |
| By: | John P. Harding (University of Connecticut); Stephen L. Ross (University of Connecticut) |
| Abstract: | Equity capital is the shock absorber for our financial system and the current financial crisis, like a bumpy road for an auto designer, provides a unique opportunity for financial regulators to evaluate the predictions of theory and improve the design of the regulatory system. The purpose of this paper is to apply a simple model of firm capital structure to the current situation and summarize the insights it provides regarding the regulation of large financial institutions in a post-crisis world. The paper begins with a brief summary of the model and uses the results of that model to place the evolution of the current crisis into perspective. The paper concludes with forward-looking observations and suggestions for future regulation. |
| Keywords: | Financial Institutions, Financial Crisis, Capital Regulation, Regulatory Reform, Firm Capital Structure |
| JEL: | G2 G2 L5 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2009-29&r=reg |
| By: | Schauer, Frederick (University of Virginia); Zeckhauser, Richard (Harvard University) |
| Abstract: | For several decades now a debate has raged about policy-making by litigation. Spurred by the way in which tobacco, environmental, and other litigation has functioned as an alternative form of regulation, the debate asks whether policy-making or regulation by litigation is more or less socially desirable than more traditional policy-making by ex ante rule-making by legislatures or administrative agencies. In this paper we step into this debate, but not to come down on one side or another, all things considered. Rather, we seek to show that any form of regulation that is dominated by high-salience particular cases is highly likely, to make necessarily general policy on the basis of unwarranted assumptions about the typicality of one or a few high-salience cases or events. Two cornerstone concepts of behavioral decision--the availability heuristic and related problems of representativeness--explain this bias. This problem is virtually inevitable in regulation by litigation, yet it is commonly found as well in ex ante rule-making, because such rule-making increasingly takes place in the wake of, and dominated by, particularly notorious and often unrepresentative outlier events. In weighing the net advantages of regulation by ex ante rule-making against those of regulation by litigation, society must recognize that any regulatory form is less effective insofar as it is unable to transcend the distorting effect of high-salience unrepresentative examples. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp09-025&r=reg |
| By: | Ojo, Marianne |
| Abstract: | This paper addresses factors which have prompted the need for further revision of banking regulation, with particular reference to the Capital Requirements Directive. The Capital Requirements Directive (CRD), which comprises the 2006/48/EC Directive on the taking up and pursuit of the business of credit institutions and the 2006/49/EC Directive on the capital adequacy of investment firms and credit institutions, implemented the revised framework for the International Convergence of Capital Measurement and Capital Standards (Basel II) within EU member states. Pro cyclicality has attracted a lot of attention – particularly with regards to the recent financial crisis, owing to concerns arising from increased sensitivity to credit risk under Basel II. This paper not only considers whether such concerns are well-founded, but also the beneficial and not so beneficial consequences emanating from Basel II’s increased sensitivity to credit risk (as illustrated by the Internal Ratings Based approaches). In so doing it considers the effects of Pillar 2 of Basel II, namely, supervisory review, with particular reference to buffer levels, and whether banks’ actual capital ratios can be expected to correspond with Basel capital requirements given the fact that they are expected to hold certain capital buffers under Pillar 2. Furthermore, it considers how regulators can respond to prevent systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. In deciding to cut back on lending activities, are the decisions of such firms justified in situations where such firms’ credit risk models are extremely and unduly sensitive - hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements ? |
| Keywords: | Basel II; Capital Requirements Directive; pro cyclicality; risk; regulation; banks |
| JEL: | E0 D0 K2 E5 E3 |
| Date: | 2009–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17379&r=reg |
| By: | JULLIEN, Bruno; POUYET, Jérôme; SAND-ZANTMAN, Wilfried |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:21000&r=reg |
| By: | Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM) |
| Abstract: | This paper revisits the impact of off-balance-sheet (OBS) activities on banks risk-return trade-off. Recent studies (e.g., Stiroh and Rumble 2006) suggest that increasing OBS activities do not necessarily yield straightforward diversification benefits for banks. However, introducing a risk premium in the standard banks returns models, and resorting to an ARCH-M procedure, Canadian data suggest that banks risk-return trade-off displays a structural break around 1997. In the second subperiod of our sample (1997-2007), we find that the noninterest income generated by OBS activities no longer impacts banks returns negatively. While during the first period (1988-1996) the volatility variable is not significant in any returns equations, a risk premium eventually emerged, pricing the risk associated to OBS activities risks. |
| Keywords: | Regulatory changes; Noninterest income; Diversification; Structural break; Risk premium. |
| JEL: | G20 G21 |
| Date: | 2009–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:032009&r=reg |
| By: | Lee, Chee Sung; Park, Cyn-Young (Asian Development Bank) |
| Abstract: | The main objective of this paper is to suggest reform measures to address the gaps and weaknesses in emerging Asia's financial regulatory and supervisory systems, on the basis of lessons drawn from the global crisis. For emerging Asia, the direct impact of the global financial crisis has been limited, thus generating substantially less pressure for financial restructuring and regulatory reform than is the case in developed economies. However, the underlying causes of the current turmoil—such as the dynamics of financial innovation and globalization—remain relevant for the region. As the world embraces wide-ranging financial reforms, emerging Asia will face dramatic changes in the global financial landscape. The region's authorities need to be prepared for the changing regulatory environment and proactive in strengthening their national regulatory and supervisory frameworks, in line with higher regulatory standards emanating from global reforms. Financial regulators will also need to design an effective and coherent framework for cross-border crisis management, and work towards a potential international regulatory and surveillance system. |
| Keywords: | Financial regulation; regulatory reform; asia; global financial crisis |
| JEL: | G28 |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0034&r=reg |
| By: | Julien Hardelin (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, AgroParisTech ENGREF - (-)); Sabine Lemoyne De Forges (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, AgroParisTech ENGREF - (-)) |
| Abstract: | We consider an oligopoly of firms that compete on price. Firms produce a non-stochastic output, insurance coverage, which is sold before the true cost is known. They behave as if they were risk-averse for a standard reason of costly external finance. The model consists in a two-stage game. At stage 1, each firm chooses its internal capital level. At stage 2, firms compete on price. We characterize the conditions for Nash equilibria and analyze the strategic impact of capital choice on the market. We discuss the model with regard to insurance industry specificity and regulation. |
| Keywords: | Price Competition; Risk-averse Firms; Insurance Market; Capital Choice. |
| Date: | 2009–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00417573_v1&r=reg |
| By: | Michael Huberman; Christopher M. Meissner |
| Abstract: | This paper challenges the received view that pins the adoption of labor regulation before 1914 on domestic forces, particularly the rises in income and voter turnout. Building on standard state-year event history analysis, we find that trade was also a main pathway of diffusion. Countries that traded with each other were more likely to establish a level playing field. The transmission mechanism was strongest in north-west Europe because intra-industry trade was significant in the region. When states failed to emulate the superior labor regulations of their most important trading partners, they left themselves vulnerable to embargos and sanctions on their exports. Threats of market loss were not credible in the New World because it exported mainly primary products and prices were fixed by world demand and supply. Domestic forces trumped international pressures to converge, with the result that labor regulation developed more slowly in regions of new settlement than in the European core. |
| JEL: | J8 N3 N40 N70 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15374&r=reg |
| By: | Regina Betz (Centre for Energy and Environmental Markets, School of Economics, University of New South Wales, Australia); Todd Sanderson (Agriculture and Resource Economics, Faculty of Agriculture, Food and Natural Resources, University of Sydney); Tihomir Ancev (Agriculture and Resource Economics, Faculty of Agriculture, Food and Natural Resources, University of Sydney) |
| Abstract: | Regulators around the world are currently considering national emissions trading systems (ETS) as a cost-effective way to reduce greenhouse gas emissions. ETS installations coverage is one of the numerous design issues confronting them. ‘Blanket coverage’ that includes all an economy’s industrial emitters of greenhouse gases has some intuitive appeal. Although it seems equitable it does not, however, take into full account all the costs related to the extent of coverage. This report shows how an alternative approach of ‘efficient coverage’ can achieve the same emission reduction outcome at lower social cost. The approach is based on maximising the benefits of including installations in an ETS, while at the same time taking into account all relevant transaction costs. A broad definition of transaction costs is used – the regulatory costs to the government as well as regulatory costs imposed on covered installations. Particularly for relatively modest emissions reduction targets, the study found there are significant cost savings with an ‘efficient coverage’ compared with ‘blanket coverage’. Key words: Emissions Trading Scheme, Environmental Policy, Installation Coverage, Transaction costs. |
| JEL: | Q50 Q58 H23 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:eenhrr:0928&r=reg |
| By: | Kristian Behrens; Yasusada Murata |
| Abstract: | We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competition effects. We then show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging prices above marginal costs. Using pro-competitive effects and the competitive limit, we finally illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility. |
| Keywords: | Pro-competitive effects, competitive limit, excess entry, trade and efficiency, monopolistic competition |
| JEL: | D43 D51 F12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0940&r=reg |