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on Regulation |
| By: | Dany Jaimovich (IUHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | The present study aims to contribute to the debate concerning the effects on economic performance and the structure of the labor market of regulations that combine high Employment Protection Legislations (EPL) with consent for the use of fixed-term contracts (FTC). Using a Rajan and Zingales (1998) difference-in-difference empirical technique in a panel of 45 countries, we explore the response of industries that differ in their "intrinsic need" of worker turnover when they face different levels of EPL and how the possibility of using FTC might change the outcome. Our approach suggests an original demand side explanation of the claiming of FTC. |
| Keywords: | Employment protection legislation, labor turnover, fixed term contracts |
| JEL: | J21 J33 J63 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp07-2009&r=reg |
| By: | Lev Ratnovski; Rocco Huang |
| Abstract: | This paper explores factors behind Canadian banks' relative resilience in the ongoing credit turmoil. We identify two main causes: a higher share of depository funding (vs. wholesale funding) in liabilities, and a number of regulatory and structural factors in the Canadian market that reduced banks' incentives to take excessive risks. The robust predictive power of the depository funding ratio is confirmed in a multivariate analysis of the performance of 72 largest commercial banks in OECD countries during the turmoil. |
| Keywords: | Bank regulations , Banking crisis , Banking sector , Canada , Commercial banks , Cross country analysis , Depositories , Economic models , Financial stability , Monetary policy , |
| Date: | 2009–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/152&r=reg |
| By: | Barry J. Eichengreen |
| Abstract: | The Global Credit Crisis of 2008-09 has underscored the urgency of reforming the international financial architecture. While a number of short-term reforms are already in train, this paper contemplates more ambitious reforms of the international financial architecture that might be implemented over the next ten years. It proposes routinizing the expansion of IMF quotas and the conduct of exchange rate surveillance. It contemplates an expanded role for the SDR in international transactions, which would require someone-like the IMF-to act as market maker. It considers proposals for reimposing Glass-Steagall-like restrictions on commercial and investment banking, something that will have to be coordinated internationally to be feasible. Other proposals would require banks to purchase capital insurance; here the question is who would be on the other side of the market. Again there is likely to be a role for the IMF. Then there are arguments for a new agency or institution to deal with cross-border bank insolvencies. Any such entity will require staff support, which might plausibly come from the Fund. Finally, some insist that international colleges of regulators are not enough-that it is desirable to create a World Financial Organization (WFO) with the power to sanction members whose national regulatory policies are not up to international standards. A WFO will similarly need staff support, of which the IMF would be one possible source. All this of course presupposes meaningful IMF governance reform so that the institution has the legitimacy and efficiency to assume these additional responsibilities. The paper therefore concludes with some conventional and unconventional proposals for IMF governance reform. |
| Keywords: | Banking sector , Credit risk , Exchange rate policy surveillance , Financial crisis , Fund role , International cooperation , International financial system , Quota increases , Risk management , SDR role , SDR transactions , SDRs , |
| Date: | 2009–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/116&r=reg |
| By: | Charles Calomiris |
| Abstract: | When and why do banking crises occur? Banking crises properly defined consist either of panics or waves of costly bank failures. These phenomena were rare historically compared to the present. A historical analysis of the two phenomena (panics and waves of failures) reveals that they do not always coincide, are not random events, cannot be seen as the inevitable result of human nature or the liquidity transforming structure of bank balance sheets, and do not typically accompany business cycles or monetary policy errors. Rather, risk-inviting microeconomic rules of the banking game that are established by government have always been the key additional necessary condition to producing a propensity for banking distress, whether in the form of a high propensity for banking panics or a high propensity for waves of bank failures. Some risk-inviting rules took the form of visible subsidies for risk taking, as in the historical state-level deposit insurance systems in the U.S., Argentina’s government guarantees for mortgages in the 1880s, Australia’s government subsidization of real estate development prior to 1893, the Bank of England’s discounting of paper at low interest rates prior to 1858, and the expansion of government-sponsored deposit insurance and other bank safety net programs throughout the world in the past three decades, including the generous government subsidization of subprime mortgage risk taking in the U.S. leading up to the recent crisis. Other risk-inviting rules historically have involved government-imposed structural constraints on banks, which include entry restrictions like unit banking laws that constrain competition, prevent diversification of risk, and limit the ability to deal with shocks. Another destabilizing rule of the banking game is the absence of a properly structured central bank to act as a lender of last resort to reduce liquidity risk without spurring moral hazard. Regulatory policy often responds to banking crises, but not always wisely. The British response to the Panic of 1857 is an example of effective learning, which put an end to the subsidization of risk through reforms to Bank of England policies in the bills market. Counterproductive responses to crises include the decision in the U.S. not to retain its early central banks, which reflected misunderstandings about their contributions to financial instability in 1819 and 1825, and the adoption of deposit insurance in 1933, which reflected the political capture of regulatory reform. |
| JEL: | E5 E58 G2 N2 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15403&r=reg |
| By: | Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva |
| Abstract: | The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. A key feature of the model is that bank capital increases incentives for banks to monitor borrowers, thereby reducing the probability of default. Basel I- and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Numerical simulations show that, depending on the elasticities that relate the repayment probability to its micro and macro determinants, and the elasticity of the risk weight (under Basel II) with respect to the repayment probability, Basel I may be more procyclical than Basel II in response to adverse supply and demand shocks. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:124&r=reg |
| By: | Gianni De Nicoló; John H. Boyd; Elena Loukoianova |
| Abstract: | Many empirical studies of banking crises have employed "banking crisis" (BC) indicators constructedusing primarily information on government actions undertaken in response to bank distress. Weformulate a simple theoretical model of a banking industry which we use to identify and constructtheory-based measures of systemic bank shocks (SBS). Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators based on four major BCseries that have appeared in the literature. Therefore, BC indicatorsactually measure lagged government responses to systemic bank shocks, rather than the occurrence of crises per se. We re-examine the separate impact of macroeconomic factors, bank market structure, deposit insurance, andexternal shocks on the probability of a systemic bank shocks and on the probability of governmentresponses to bank distress. The impact of these variables on the likelihood of a government responseto bank distress is totally different from that on the likelihood of a systemic bank shock.Disentangling the effects of systemic bank shocks and government responses turns out to be crucial inunderstanding the roots of bank fragility. Many findings of a large empirical literature need to be re-assessed and/or re-interpreted. |
| Keywords: | Banking crisis , Banking sector , Banks , Cross country analysis , Deposit insurance , Economic models , External shocks , Financial crisis , |
| Date: | 2009–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/141&r=reg |
| By: | Gianni De Nicoló; John H. Boyd; Abu M. Jalal |
| Abstract: | We study a banking model in which banks invest in a riskless asset and compete in both deposit and risky loan markets. The model predicts that as competition increases, both loans and assets increase; however, the effect on the loans-to-assets ratio is ambiguous. Similarly, as competition increases, the probability of bank failure can either increase or decrease. We explore these predictions empirically using a cross-sectional sample of 2,500 U.S. banks in 2003, and a panel data set of about 2600 banks in 134 non-industrialized countries for the period 1993-2004. With both samples, we find that banks' probability of failure is negatively and significantly related to measures of competition, and that the loan-to-asset ratio is positively and significantly related to measures of competition. Furthermore, several loan loss measures commonly employed in the literature are negatively and significantly related to measures of bank competition. Thus, there is no evidence of a trade-off between bank competition and stability, and bank competition seems to foster banks' willingness to lend. |
| Keywords: | Asset management , Banking , Bankruptcy , Banks , Competition , Credit risk , Cross country analysis , Depositories , Economic models , Financial crisis , Time series , United States , |
| Date: | 2009–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/143&r=reg |
| By: | Kai Kohlberger (Financial Services Authority); Richard Johnson (Financial Services Authority) |
| Abstract: | This paper describes economic research conducted for the second stage of the Mortgage Effectiveness Review. Mortgage Conduct of Business (MCOB) regulation came into effect in the UK on 31 October 2004. This paper tests one of the intended long-term benefits of MCOB regulation to consumers – ‘Do consumers take out suitable and good value mortgages?’ – focusing on the mortgage market for borrowers with impaired credit histories. The rate of mortgage arrears and repossessions has typically been higher among these borrows than in the prime market. Also, such mortgages are almost exclusively available through advisers that customers rely on to identify the best option for them.1 We use arrears, or shortfalls on two consecutive monthly mortgage bills by borrowers, as a measure of how suitable the mortgage contracts were when they were originated. We did not detect a systematic effect of MCOB on arrears rates in the sample. There was no visible step change in arrears rates around the time of MCOB and we estimate in our preferred regression model an effect of MCOB that is very small and close to zero. The sign on the MCOB variable is also not stable to changes in the controls used. We interpret this finding as a lack of consistent evidence for an effect of MCOB on the rate of arrears. Since arrears rates were used as a measure for suitability, this means that we could not identify an appreciable impact of MCOB on suitability. |
| Keywords: | mortgages, financial regulation, suitability |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:fsa:occpap:35&r=reg |
| By: | William Francis (Financial Services Authority); Matthew Osborne (Financial Services Authority) |
| Abstract: | Using bank-level panel data from the United Kingdom, this paper investigates the factors that influence banking institutions' choice of risk-based capital ratios. Special focus is placed on evaluating whether and how institutions respond to changes in regulatory capital requirements and if these responses vary across the economic cycle. This issue is of particular interest to policymakers that rely on capital regulation in conjunction with other supervisory tools to affect bank behaviours and maintain market confidence and financial stability more broadly. The paper also explores the extent to which UK banks’ capital management practices were procyclical under Basel I. Understanding whether such practices existed under this less risk-sensitive (and potentially, less procyclical) regulatory capital regime is a useful first step towards determining if banks, in their capital management practices, consider swings in economic conditions on their capital positions and lending capacities, which may, in turn, impact on the severity and duration of such economic cycles. We find a statistically significant association between banks' risk-based capital ratios and individual capital requirements set by regulators in the UK. We also find that the rate at which banks respond to changing capital requirements depends significantly on certain characteristics of the bank (e.g., size, exposure to market discipline, nearness to regulatory threshold) as well as the direction of the economic cycle. We find a (marginally statistically significant) negative association between capital ratios and the economic cycle, but no association when we focus only on the largest banks in the UK, suggesting that systemically important banks tend to maintain risk-based capital ratios over the cycle (although we note that this finding is based on a sample period which does not contain a significant downturn). Further, we note a positive association between capital ratios and capital quality, suggesting that reliance on capital with relatively higher adjustment costs (e.g., tier 1 capital) may raise the profile of that consideration in capital management practices and lead cost-minimizing banks to maintain higher total risk-based capital ratios overall. Finally, we find a positive marginal effect of market discipline on total risk-based capital ratios held by UK banks. We interpret this result as suggesting that banks mitigate expected market reactions (e.g., on their funding costs or ability to access certain capital markets activities) to their business decisions by holding higher capital ratios. |
| Keywords: | bank, capital, financial regulation, prudential policy |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:fsa:occpap:31&r=reg |
| By: | Donato Masciandaro; Marc Quintyn; MarÃa Nieto |
| Abstract: | In June 2009 a new financial supervisory framework for the European Union (EU) was endorsed, consisting of a macro- and a micro-prudential pillar. The latter is composed of a Steering Committee, a supranational layer and a network of national supervisory authorities at the bottom, de facto establishing a complex multiple principals-multiple agents network. This paper focuses on the network of national agencies. Starting from an analysis of supervisory architectures and governance arrangements, we assess to what extent lack of convergence could undermine efficient and effective supervision. The main conclusion is that harmonization of governance arrangements towards best practice would better align supervisors' incentive structures and, hence, be beneficial for the quality of supervision. |
| Keywords: | Bank supervision , Banks , Budgetary policy , Central banks , Economic integration , European Union , Financial sector , Financial systems , Governance , Legislation , Monetary authorities , Transparency , |
| Date: | 2009–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/142&r=reg |
| By: | John Kiff |
| Abstract: | Klyuev (2008) concluded that the Canadian market for housing finance is highly advanced and sophisticated, but financing options were somewhat limited, particularly at terms longer than five years. This paper argues that the paucity of longer-term loans is caused by a five-year maturity cap on government-guaranteed deposit insurance, and a prepayment penalty limit on residential mortgage loans in the Interest Act. That said, the availability and cost of residential loans for prime borrowers are comparable to those in the United States. |
| Keywords: | Bank regulations , Banking sector , Borrowing , Canada , Cross country analysis , Financial systems , Housing , Interest rates , Loans , United States , |
| Date: | 2009–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/130&r=reg |
| By: | Florian Heiss; Daniel McFadden; Joachim Winter |
| Abstract: | We study the Medicare Part D prescription drug insurance program as a bellwether for designs of private, non-mandatory health insurance markets that control adverse selection and assure adequate access and coverage. We model Part D enrollment and plan choice assuming a discrete dynamic decision process that maximizes life-cycle expected utility, and perform counterfactual policy simulations of the effect of market design on participation and plan viability. Our model correctly predicts high Part D enrollment rates among the currently healthy, but also strong adverse selection in choice of level of coverage. We analyze alternative designs that preserve plan variety. |
| JEL: | C25 D12 H51 I11 I18 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15392&r=reg |
| By: | Adrian Pop (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | The logic behind the indirect channel of market discipline presumes that the pricing of bank debt in the secondary market, if accurate, conveys to supervisor and other market participants a reliable signal of bank's financial conditions and default risk. By collecting a unique dataset of spreads, ratings, and accounting measures of bank risk for a sample of large European banking organizations during the 1995—2002 period, we empirically test whether secondary market prices accurately reflect financial conditions of bank issuers. Our results complement the findings obtained by Sironi [Testing for market discipline in the European banking industry: Evidence from subordinated debt issues. Journal of Money, Credit, and Banking 35 (2003) 443-472] on the primary market of bank subordinated debt |
| Date: | 2009–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00419241_v1&r=reg |
| By: | Wu, Steven Y. (Purdue University) |
| Abstract: | This study models producer protection legislation that would grant growers the right to claim damages (PPLD) if their contracts are prematurely terminated. In the absence of contracting frictions that prevent contractors from redesigning contracts to accommodate exogenous policy changes, PPLD would not be distortionary or redistributive. If contracting frictions exist, then PPLD would have efficiency and redistributive effects, though the direction and magnitude depends on the size of PPL damages vis-à-vis expected damages under existing contract law. This study clarifies the conditions under which PPLD would decrease efficiency and protect growers. |
| Keywords: | producer protection legislation, agricultural policy, moral hazard, contracts, contract law |
| JEL: | Q12 Q18 K12 D82 D86 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4373&r=reg |