nep-reg New Economics Papers
on Regulation
Issue of 2009‒11‒27
twelve papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. A Cost-Benefit Framework for the Assessment of Non-Tariff Measures in Agro-Food Trade By Frank van Tongeren; John Beghin; Stéphan Marette
  2. Regulatory Competition and Bank Risk Taking By Agur, Itai
  3. Privatization in development : some lessons from experience By Bourguignon, Francois; Sepulveda, Claudia
  4. Mitigating the Procyclicality of Basel II By Repullo, Rafael; Saurina, Jesús; Trucharte, Carlos
  5. Accounting discretion of banks during a financial crisis By Huizinga, Harry; Laeven, Luc
  6. Paulson's Gift By Veronesi, Pietro; Zingales, Luigi
  7. Going on the Long Race? - Employment Duration and (De)Regulation of Experimental Stochastic Labor Markets By Siegfried Berninghaus; Sabrina Bleich; Werner Güth
  8. Accounting Regulation and Management Discretion in a British Building Society, Circa 1960 By Batiz-Lazo, Bernardo; Billings, Mark
  9. Fines, Leniency and Rewards in Antitrust: an Experiment By Bigoni, Maria; Fridolfsson, Sven-Olof; Le Coq, Chloé; Spagnolo, Giancarlo
  10. "It Pays to Violate: How Effective are the Basel Accord Penalties?" By Bernardo da Veiga; Felix Chan; Michael McAleer
  11. Basel core principles and bank soundness : does compliance matter ? By Demirguc-Kunt, Asli; Detragiache, Enrica
  12. How to Measure the Deterrence Effects of Merger Policy: Frequency or Composition? By Barros, Pedro Luis Pita; Clougherty, Joseph A.; Seldeslachts, Jo

  1. By: Frank van Tongeren; John Beghin; Stéphan Marette
    Abstract: This report develops a conceptual framework for the assessment of costs and benefits associated with non-tariff measures that allows an evidence-based comparative assessment of alternative regulatory approaches.
    Keywords: agriculture in international trade, economics of regulation, information and product quality, international trade organisations, standardization and compatibility, trade policy
    JEL: F13 L15 L51 Q17
    Date: 2009–11
  2. By: Agur, Itai
    Abstract: How damaging is competition between bank regulators? This paper models regulators that compete because they want to supervise more banks. Both banks' risk profiles and their access to wholesale funding are endogenous, leading to rich interactions. The sensitivity of regulatory standards to bank moral hazard, adverse selection, liquidity risk and the degree of regulatory bias is investigated. A calibration suggests that regulatory reform can halve bank default rates. The paper also shows how a decline in regulators' monitoring capacity gives rise to a gradual rise in bank risk, followed by a sudden interbank crisis.
    Keywords: Arbitrage; Bank default; Interbank market; Moral hazard; Supervision
    JEL: G21 G28
    Date: 2009–10
  3. By: Bourguignon, Francois; Sepulveda, Claudia
    Abstract: This paper briefly reviews the main theories of state versus private ownership and empirical evidence on the impact of privatization in developing countries (including transition economies). The paper draws some lessons for policy and offers some suggestions on how to assess privatization, at least in countries where there is still scope for it. The paper suggests that although understanding of the efficiency gains of privatization has increased significantly in recent years, there is an important area about which little is known: the distributional effects of privatization. Whether arguing from the standpoint of welfare economics or political economy, distributional effects are critical to the outcome, or the perceived outcome, of privatization. Thus, there is a need to fully evaluate the ex ante and ex post impacts of privatization, the most effective types of regulation and ownership regimes, and the way in which losers, when there are any, can be compensated. This is a need that must be met by academics and development agencies, including the World Bank and regional development banks.
    Keywords: Banks&Banking Reform,Privatization,Emerging Markets,Infrastructure Regulation,Bankruptcy and Resolution of Financial Distress
    Date: 2009–11–01
  4. By: Repullo, Rafael; Saurina, Jesús; Trucharte, Carlos
    Abstract: This paper compares alternative procedures to mitigate the procyclicality of the new risk-sensitive bank capital regulation (Basel II). We estimate a model of the probabilities of default (PDs) of Spanish firms during the period 1987-2008, and use the estimated PDs to compute the corresponding series of Basel II capital requirements per unit of loans. These requirements move significantly along the business cycle, ranging from 7.6% (in 2006) to 11.9% (in 1993). The comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each smoothed series with respect to the Hodrick-Prescott trend of the original series. The results show that the best procedures are either to smooth the inputs of the Basel II formula by using through-the-cycle PDs or to smooth the output with a multiplier based on GDP growth. Our discussion concludes that the latter is better in terms of simplicity, transparency, and consistency with banks’ risk pricing and risk management systems. For the portfolio of Spanish commercial and industrial loans and a 45% loss given default (LGD), the multiplier would amount to a 6.5% surcharge for each standard deviation in GDP growth. The surcharge would be significantly higher with cyclically-varying LGDs.
    Keywords: Bank capital regulation; Basel II; Business cycles; Credit crunch; Procyclicality
    JEL: E32 G28
    Date: 2009–07
  5. By: Huizinga, Harry; Laeven, Luc
    Abstract: This paper presents evidence of banks using accounting discretion to overstate the value of distressed assets. In particular, we show that the stock market applies far greater discounts to a bank’s real estate loans and mortgage-backed securities than are implicit in the book values of these assets, especially following the onset of the U.S. mortgage crisis. This suggests that bank balance sheets overvalue real estate related assets during economic slowdowns. Estimated discounts are smaller for distressed banks, as these banks derive relatively large benefits from the financial safety net to offset asset impairment. We also find that bank share prices, especially for banks with large exposures to mortgage-backed securities, react favorably to recent changes in accounting rules that relax fair value accounting. Banks with large exposures to mortgage-backed securities are also found to provision less for bad loans. Finally, we find that banks, and especially distressed banks, use discretion in the classification of mortgage-backed securities so as to inflate the book value of these securities. Our results provide several pieces of compelling evidence that banks’ balance sheets offer a distorted view of the financial health of the banks, especially for banks with large exposures to real estate loans and mortgage-backed securities, and suggest that recent changes that relax fair value accounting may further distort this picture.
    Keywords: accounting standards; bank regulation; fair value accounting; financial crisis; mortgage-backed securities; real estate loans
    JEL: G14 G21
    Date: 2009–07
  6. By: Veronesi, Pietro; Zingales, Luigi
    Abstract: We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’cost of $25 -$47 billions with a net benefit between $84bn and $107bn. By looking at the limited cross section we infer that this net benefit arises from a reduction in the probability of bankruptcy, which we estimate would destroy 22% of the enterprise value. The big winners of the plan were the three former investment banks and Citigroup, while the loser was JP Morgan.
    Keywords: bankruptcy; credit crisis; government intervention
    JEL: G21 G28
    Date: 2009–11
  7. By: Siegfried Berninghaus (Institut für Wirtschaftstheorie und Operations Research, University of Karlsruhe); Sabrina Bleich (Institut für Wirtschaftstheorie und Operations Research, University of Karlsruhe); Werner Güth (Max Planck Institute of Economics, Jena)
    Abstract: If the future market wage is uncertain, engaging in long-term employment is risky, with the risk depending on how regulated the labor market is. In our experiment long-term employment can result either from offering long-term contracts or from repeatedly and mutually opting for rematching. Treatments differ in how regulations restrict the employer's flexibility in adapting the employment contract to changes of the market (wage). All treatments allow for longer contract duration as well as for mutually opting to be rematched. Effort is chosen by employees after a contract is concluded. Treatments vary from no flexibility to no restriction at all. Will more (downward) flexibility be used in ongoing employment but reduce efficiency? If so, deregulation may weaken rather than promote labor market efficiency. And will regulation crowd out long-term employment, either in the form of long-term contracts or voluntary rematching?
    Keywords: deregulation, employment contracts, wage flexibility, principal-agent theory, experimental economics, repeated interaction
    JEL: C72 C90 F16 J21 J24 L10
    Date: 2009–11–12
  8. By: Batiz-Lazo, Bernardo; Billings, Mark
    Abstract: This article explores the manipulation of published financial reports in order to counter the potentially unfavourable impact of newly introduced regulation. In this case the reported capital ratio of a major building society was enhanced using a sale and leaseback transaction with a related party and a change in depreciation policy, methods which reflected limited alternatives. Analysis of the case is set in the context of the mid-term performance of the building society sector and addresses the questions of whether the manipulations involved were within then-prevailing generally accepted accounting principles and why, despite disclosure in the society’s financial statements, these failed to attract public comment or concern, regulatory action or an audit qualification. In examining a major British mutual financial organisation we depart from traditional analyses of managerial discretion in accounting choices in manufacturing, mining and transport companies prior to the watershed Companies Act 1948.
    Keywords: Accounting manipulation; Creative accounting; Sale and leaseback; Depreciation; Building societies; United Kingdom
    JEL: N24 M42 D82
    Date: 2009–05
  9. By: Bigoni, Maria; Fridolfsson, Sven-Olof; Le Coq, Chloé; Spagnolo, Giancarlo
    Abstract: This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.
    Keywords: Cartels; Collusion; Competition policy; Coordination; Corporate crime; Desistance; Deterrence; Law enforcement; Organized crime; Price-fixing; Punishment; Whistleblowers
    JEL: C73 C92 K21 L41
    Date: 2009–08
  10. By: Bernardo da Veiga (School of Economics and Finance, Curtin University of Technology); Felix Chan (School of Economics and Finance, Curtin University of Technology); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo)
    Abstract: The internal models amendment to the Basel Accord allows banks to use internal models to forecast Value-at-Risk (VaR) thresholds, which are used to calculate the required capital that banks must hold in reserve as a protection against negative changes in the value of their trading portfolios. As capital reserves lead to an opportunity cost to banks, it is likely that banks could be tempted to use models that underpredict risk, and hence lead to low capital charges. In order to avoid this problem the Basel Accord introduced a backtesting procedure, whereby banks using models that led to excessive violations are penalised through higher capital charges. This paper investigates the performance of five popular volatility models that can be used to forecast VaR thresholds under a variety of distributional assumptions. The results suggest that, within the current constraints and the penalty structure of the Basel Accord, the lowest capital charges arise when using models that lead to excessive violations, thereby suggesting the current penalty structure is not severe enough to control risk management. In addition, an alternative penalty structure is suggested to be more effective in aligning the interests of banks and regulators.
    Date: 2009–10
  11. By: Demirguc-Kunt, Asli; Detragiache, Enrica
    Abstract: This paper studies whether compliance with the Basel Core Principles for effective banking supervision is associated with bank soundness. Using data for more than 3,000 banks in 86 countries, the authors find that neither the overall index of compliance with the Basel Core Principles nor the individual components of the index are robustly associated with bank risk measured by Z-scores. The results of the analysis cast doubt on the usefulness of the Basel Core Principles in ensuring bank soundness.
    Keywords: Banks&Banking Reform,Public Sector Corruption&Anticorruption Measures,Financial Intermediation,Debt Markets,Hazard Risk Management
    Date: 2009–11–01
  12. By: Barros, Pedro Luis Pita; Clougherty, Joseph A.; Seldeslachts, Jo
    Abstract: We show that the number of merger proposals (frequency-based deterrence) is a more appropriate indicator of underlying changes in merger policy than the relative anti-competitiveness of merger proposals (composition-based deterrence). This has strong implications for the empirical analysis of the deterrence effects of merger policy enforcement, and potential implications regarding how to reduce anti-competitive merger proposals.
    Keywords: antitrust; deterrence; merger policy
    JEL: K21 L40 L49
    Date: 2009–09

This nep-reg issue is ©2009 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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