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on Regulation |
| By: | Sanders Shaffer |
| Abstract: | There is a popular belief that the confluence of bank capital rules and fair value accounting helped trigger the recent financial crisis. The claim is that questionable valuations of long term investments based on prices obtained from illiquid markets created a pro-cyclical effect whereby mark to market adjustments reduced regulatory capital forcing banks to sell off investments which further depressed prices. This ultimately led to bank instability and the credit effects that reached a peak late in 2008. This paper analyzes a sample of large banks to attempt to measure the strength of the link between fair value accounting, regulatory capital rules, pro-cyclicality and financial contagion. The focus is on large banks because they value a significant portion of their balance sheets using fair value. They also hold investment portfolios that contain illiquid assets in large enough volumes to possibly affect the market in a pro-cyclical fashion. The analysis is based on a review of recent historical financial data. The analysis does not reveal a clear link for most banks in the sample, but rather suggests that there may have been other more significant factors putting stress on bank regulatory capital. |
| Keywords: | Global financial crisis ; Bank capital ; Banks and banking - Accounting |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:qau10-01&r=reg |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Wayne Tarrant (Wingate University - Department of Mathematics) |
| Abstract: | The banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements. |
| Keywords: | Risk measure ; Value at Risk ; Bank capital ; Basel II Accord |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00460901_v1&r=reg |
| By: | Olivier Charlot; Franck Malherbert |
| Abstract: | This paper studies the impact of an European-like labor market regulation on the return to schooling, equilibrium unemployment and welfare. We show that firing costs and temporary employment have opposite effects on educational choices. We furthermore demonstrate that a laissez faire economy with no regulation is inefficient as it is characterized by insufficient educational investments leading to excess job destruction and inadequate job creation. By stabilizing employment relationships, firing costs may spur educational investments and therefore lead to welfare and productivity gains, though a first-best policy would be to subsidize education. However, there is little chance for a dual labor market, as is common in many European countries, with heavily regulated long-term contracts and more flexible short-term contracts to raise the incentives to schooling and aggregate welfare. |
| Keywords: | Human capital, job destruction, matching frictions, efficiency |
| JEL: | I20 J20 J60 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1012&r=reg |
| By: | Carlo Cambini; Laura Rondi |
| Abstract: | We examine theoretically and empirically the relationship between access regulation, financial structure and investment decisions in network industries, analyzing if financial variables can be used as a strategic device to influence the regulator’s price setting decisions. Using a panel of 15 EU Public Telecommunication Operators (PTOs) over the period 1994-2005, we first investigate the determinants of regulated prices (both wholesale and retail), firm financial structure and investment, and then test the relationship between leverage, regulated charges and firm’s investment. However, our model suggests that if leverage influences the regulated access charges, then it will also impact competition in the downstream segment. Therefore, we also investigate the impact of the PTO’s leverage on market competition. Our results show that leverage positively affects regulated rates, as well as the PTOs’ investment rate, as predicted by Spiegel and Spulber (1994). Moreover, higher leverage also leads to higher access charges and an increase in leverage is followed by a decrease in the number of competitors and by an increase of the incumbent’s market share. This suggests that the strategic use of debt to discipline the regulator’s lack of commitment within a vertically integrated network industry may somewhat impair or delay competition in the retail segment, but has a favorable counterpart in mitigating the underinvestment problem. |
| Keywords: | L51, G31, G32, L96, Telecommunications, Access Pricing, Capital Structure, Leverage, Fixed Investment, Competition |
| Date: | 2009–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:rsc:rsceui:2009/68&r=reg |
| By: | Roos, Christof |
| Abstract: | The aim of this article is to develop an analytical framework which contributes to the understanding of mobility regulation. While most literature focuses on international efforts to control migration the perspective is widened by looking at mobility, encompassing short-term cross border movements for the purpose of travel and labor. Regulatory modes are specified and described ranging from more binding bi- and multilateral agreements to less binding governmental networks. Little attention has been paid to the latter modes which increasingly define state to state cooperation. Since mobility regulation on the global level is in a nascent stage, regulatory modes are assessed within regional economical integration movements such as the EU and NAFTA. Mobility regulation within the two blocs differs greatly; within the EU framework freedom of movement and establishment has been achieved while travel and labor in the North American context are mostly regulated in the respective national realms. Still, forms of cooperation on mobility have been established in both cases with similar functions: the socialization of officials into trusting each other. ; Die Kontrolle globaler Mobilität durch regionale gouvernementale Netzwerke ist das Thema des Artikels. Der Vergleich von Moblititätsregulierung in der Europäischen Union (EU) mit der Nordamerikanischen Freihandelszone (NAFTA) soll die angewandten Modi der Regulierung aufzeigen. Ziel der Untersuchung ist die Entwicklung eines analytischen Rahmens, welcher zum Verständnis von Mobilitätsregulierung beiträgt. Während sich sehr viele Arbeiten der internationalen Zusammenarbeit in der Migrationskontrolle widmen, erweitert dieser Beitrag die Perspektive und betrachtet die Regulierung von kurzfristigen grenzüberschreitenden Bewegungen. Das heißt, es werden Regelungen betrachtet, die internationale kurzfristige Arbeitsmigration sowie die Kontrolle von Reisenden steuern. Dabei konzentriert sich der Artikel auf Mobilitätsregulierung, die durch bi- und multilaterale Abkommen festgeschrieben werden aber auch innerhalb von weniger verbindlichen gouvernementalen Netzwerken getroffen werden. Die Entstehung dieser Netzwerke im Bereich der Mobilitätspolitik fand bisher kaum Beachtung auch wenn diese die Kooperation zwischen Staaten immer mehr bestimmen. Verglichen werden die Netzwerke innerhalb derer die USA mit Mexiko und Kanada kooperieren. Zwei kleinere EU Mitgliedstaaten, Österreich und Finland, exemplifizieren diese Kooperation innerhalb des EU Rahmens. Die Modi der Regulation als auch die Folgen der Kooperation differieren stark; innerhalb des EU Rahmens konnte Bewegungs- bzw. Niederlassungsfreiheit für Touristen und mobile Arbeiter realisiert werden. In Nordamerika werden beide Mobilitätsformen noch weitgehend national reguliert. Dennoch lässt sich auch dort Kooperation feststellen, die vor allem innerhalb von Netzwerken stattfindet. In beiden Fällen zeigt sich eine ähnliche Funktion der Netzwerke: die Verstetigung von Vertrauen zwischen den Vertretern der Kontrollbehörden. -- |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:sfb597:110&r=reg |
| By: | Sjaak Hurkens; Ángel L. López |
| Abstract: | We re-examine the literature on mobile termination in the presence of network externalities. Externalities arise when firms discriminate between on- and off-net calls or when subscription demand is elastic. This literature predicts that profit decreases and consumer surplus increases in termination charge in a neighborhood of termination cost. This creates a puzzle since in reality we see regulators worldwide pushing termination rates down while being opposed by network operators. We show that this puzzle is resolved when consumers' expectations are assumed passive but required to be fulfilled in equilibrium (as defined by Katz and Shapiro, AER 1985), instead of being rationally responsive to non-equilibrium prices, as assumed until now. |
| Keywords: | Networks, Rational Expectations, Access Pricing, Interconnection, Regulation, Telecommunications |
| JEL: | D4 K23 L51 L96 |
| Date: | 2010–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:812.10&r=reg |
| By: | Thomas Bernauer; Anna Kalbhenn; Vally Koubi; Gabi Ruoff |
| Abstract: | We argue that participation in international agreements is influenced by their design characteristics, notably commitment levels, measured by the specificity of obligations, and compliance mechanisms, measured by monitoring, enforcement, assistance, and dispute settlement provisions in treaties. We submit that specific obligations as well as monitoring and enforcement have a negative, and assistance and dispute settlement a positive effect on participation. These arguments are tested on a new dataset that includes information on ratifications of more than 200 global environmental agreements in 1950- 2006. We find that specific obligations, assistance, and dispute settlement have the expected effects. Surprisingly, our results show that the presence (or absence) of monitoring and enforcement has no effect on participation. The latter finding suggests that monitoring and enforcement through mechanisms operating outside of treaties rather than through treaty obligations themselves are likely to play a significant role. |
| Date: | 2010–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:94&r=reg |
| By: | Jana Krajcova |
| Abstract: | In this paper, I analyze the effects of monitoring on an agent’s incentives in a two-period principal-agent model in which the agent decides on his effort and corruptibility. The agent’s type and strategy are unknown to the principal. I compare incentive-compatible wages under three different scenarios: when the principal does not monitor and only observes output; when she monitors the agent’s effort choice; and when she monitors the agent’s corruptibility. I find that monitoring of effort improves the sorting of types but it might also give the agent more incentive to be corrupt. Monitoring of corruption does not improve the sorting of types but it negatively affects the agent’s incentive to be corrupt. |
| Keywords: | Corruption, monitoring, contract, incentive-compatibility. |
| JEL: | D73 D86 K42 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp404&r=reg |
| By: | McAleer, Michael; Jimenez-Martin, Juan-Angel; Perez Amaral, Teodosio |
| Abstract: | In this paper we advance the idea that optimal risk management under the Basel II Accord will typically require the use of a combination of different models of risk. This idea is illustrated by analyzing the best empirical models of risk for five stock indexes before, during, and after the 2008-09 financial crisis. The data used are the Dow Jones Industrial Average, Financial Times Stock Exchange 100, Nikkei, Hang Seng and Standard and Poor’s 500 Composite Index. The primary goal of the exercise is to identify the best models for risk management in each period according to the minimization of average daily capital requirements under the Basel II Accord. It is found that the best risk models can and do vary before, during and after the 2008-09 financial crisis. Moreover, it is found that an aggressive risk management strategy, namely the supremum strategy that combines different models of risk, can result in significant gains in average daily capital requirements, relative to the strategy of using single models, while staying within the limits of the Basel II Accord. |
| Keywords: | Optimal risk management; average daily capital requirements; alternative risk strategies; value-at-risk forecasts; combining risk models |
| JEL: | G11 C53 C22 G32 |
| Date: | 2009–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20975&r=reg |
| By: | Chaney, Paul; Faccio, Mara; Parsley, David |
| Abstract: | We document that the quality of earnings reported by politically connected firms is significantly poorer than that of similar non-connected companies. Moreover, we find that earnings quality has no predictive power for the likelihood of establishing connections. Hence, we rule out that our results (on average) are simply due to firms with ex-ante poor earnings quality establishing connections more often. Instead, our results suggest that, because of a lesser need to respond to market pressures to increase the quality of information, connected companies can afford disclosing lower quality accounting information. In particular, lower quality reported earnings is associated with a higher cost of debt only for the non-politically connected firms in the sample. |
| Keywords: | political Ties; information quality |
| JEL: | G1 G3 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21116&r=reg |
| By: | Bennett, Matthew; Fletcher, Amelia; Giovannetti , Emanuele; Stallibrass, David |
| Abstract: | The paper sets out why we consider that the legal framework in the EU amplifies what are in reality relatively small differences in thinking around RPM. Primarily, this is because it asks economists, in the name of legal certainty, to draw a false dichotomy between agreements and practices which are harmful and those which are beneficial. We then provide a summary of the literature on RPM and, based on this thinking, set out a few small steps that might be taken towards a more nuanced approach to assessing RPM, within a 'presumed illegality' framework without sacrificing the beneficial legal certainty that the current approach brings. |
| Keywords: | Competition Policy; RPM; Resale Price Maintenance |
| JEL: | L42 D02 K21 |
| Date: | 2010–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21121&r=reg |
| By: | Swagel, Phillip |
| Abstract: | This paper reviews the policy response to the 2007–09 financial crisis from the perspective of a senior Treasury official at the time. Government agencies faced severe constraints in addressing the crisis: lack of legal authority for potentially helpful financial stabilization measures, a Congress reluctant to grant such authority, and the need to act quickly in the midst of a market panic. Treasury officials recognized the dangers arising from mounting foreclosures and worked to facilitate limited mortgage modifications, but going further was politically unacceptable because public funds would have gone to some irresponsible borrowers. The suddenness of Bear Stearns’ collapse in March 2008 made rescue necessary and led to preparation of emergency options should conditions worsen. The Treasury saw Fannie Mae and Freddie Mac’s rescue that summer as necessary to calm markets, despite the moral hazard created. After Lehman Brothers failed in September, the Treasury genuinely intended to buy illiquid securities from troubled institutions but turned to capital injections as the crisis deepened. |
| Keywords: | financial crisis; Treasury Department; TARP; housing; foreclosures; Lehman Brothers |
| JEL: | E0 N2 |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21104&r=reg |