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on Regulation |
| By: | Paolo Angelini (Banca d'Italia); Andrea Enria (Banca d'Italia); Stefano Neri (Banca d'Italia); Fabio Panetta (Banca d'Italia); Mario Quagliariello (Banca d'Italia) |
| Abstract: | We use a macroeconomic euro area model with a bank sector to study the pro-cyclical effect of the capital regulation, focusing on the extra pro-cyclicality induced by Basel II over Basel I. Our results suggest that this incremental effect is modest. We also find that regulators could offset the extra pro-cyclicality by a countercyclical capital-requirements policy. Our results also suggest that banks may have incentives to accumulate countercyclical capital buffers, making this policy less relevant, but this finding is depends on the type of economic shock posited. We also survey different policy options for dealing with procyclicality and discuss the pros and cons of the measures available. |
| Keywords: | Basel accord, pro-cyclicality |
| JEL: | E32 E44 E58 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_74_10&r=reg |
| By: | Clevo Wilson (QUT); Manel Jayamanna; Wasantha Athukorala (QUT) |
| Abstract: | This chapter examines why policy decision-makers opt for command and control environmental regulation despite the availability of a plethora of market-based instruments which are more efficient and cost-effective. Interestingly, Sri Lanka has adopted a wholly command and control system, during both the pre and post liberalisation economic policies. This chapter first examines the merits and demerits of command and control and market-based approaches and then looks at Sri Lanka’s extensive environmental regulatory framework. The chapter then examines the likely reasons as to why the country has gone down the path of inflexible regulatory measures and has become entrenched in them. The various hypotheses are discussed and empirical evidence is provided. The chapter also discusses the consequences of an environmentally slack economy and policy implications stemming from adopting a wholly regulatory approach. The chapter concludes with a discussion of the main results. |
| Keywords: | Command and control vs market-based instruments, Environmental and health effects, Economic analysis, Policy implications |
| JEL: | Q52 Q56 Q58 Q59 |
| Date: | 2010–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:qut:dpaper:259&r=reg |
| By: | Anat R. Admati (Graduate School of Business, Stanford University); Peter M. DeMarzo (Graduate School of Business, Stanford University); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods); Paul Pfleiderer (Graduate School of Business, Stanford University) |
| Abstract: | We examine the pervasive view that “equity is expensive,” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. Any desirable public subsidies to banks’ activities should be given directly and not in ways that encourage leverage. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support. We conclude that bank equity is not socially expensive, and that high leverage is not necessary for banks to perform all their socially valuable functions, including lending, taking deposits and issuing money-like securities. To the contrary, better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal, and, viewed from an ex ante perspective, high leverage may not even be privately optimal for banks. Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy. |
| Keywords: | capital regulation, financial institutions, capital structure, too big to fail, systemic risk, bank equity, contingent capital, Basel. |
| JEL: | G32 K23 G21 G28 G38 H81 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2010_42&r=reg |
| By: | Renaud Bourlès; Gilbert Cette; Jimmy Lopez; Jacques Mairesse; Giuseppe Nicoletti |
| Abstract: | Based on an endogenous growth model, we show that intermediate goods markets imperfections can curb incentives to improve productivity downstream. We confirm such prediction by estimating a model of multifactor productivity growth in which the effects of upstream competition vary with distance to frontier on a panel of 15 OECD countries and 20 sectors over 1985-2007. Competitive pressures are proxied with sectoral product market regulation data. We find evidence that anticompetitive upstream regulations have curbed MFP growth over the past 15 years, more strongly so for observations that are close to the productivity frontier. |
| JEL: | C23 L16 L5 O43 O57 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16520&r=reg |
| By: | Éric Tymoigne |
| Abstract: | Over the past 40 years, regulatory reforms have been undertaken on the assumption that markets are efficient and self-corrective, crises are random events that are unpreventable, the purpose of an economic system is to grow, and economic growth necessarily improves well-being. This narrow framework of discussion has important implications for what is expected from financial regulation, and for its implementation. Indeed, the goal becomes developing a regulatory structure that minimizes the impact on economic growth while also providing high-enough buffers against shocks. In addition, given the overarching importance of economic growth, economic variables like profits, net worth, and low default rates have been core indicators of the financial health of banking institutions. This paper argues that the framework within which financial reforms have been discussed is not appropriate to promoting financial stability. Improving capital and liquidity buffers will not advance economic stability, and measures of profitability and delinquency are of limited use to detect problems early. The paper lays out an alternative regulatory framework and proposes a fundamental shift in the way financial regulation is performed, similar to what occurred after the Great Depression. It is argued that crises are not random, and that their magnitude can be greatly limited by specific pro-active policies. These policies would focus on understanding what Ponzi finance is, making a difference between collateral-based and income-based Ponzi finance, detecting Ponzi finance, managing financial innovations, decreasing competitions in the banking industry, ending too-big-to-fail, and deemphasizing economic growth as the overarching goal of an economic system. This fundamental change in regulatory and supervisory practices would lead to very different ways in which to check the health of our financial institutions while promoting a more sustainable economic system from both a financial and a socio-ecological point of view. |
| Keywords: | Financial Crisis; Financial Regulation; Banking Supervision; Sustainability |
| JEL: | E12 E58 G18 G28 Q01 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_637&r=reg |
| By: | Céline Gauthier; Zhongfang He; Moez Souissi |
| Abstract: | We offer a multi-period systemic risk assessment framework with which to assess recent liquidity and capital regulatory requirement proposals in a holistic way. Following Morris and Shin (2009), we introduce funding liquidity risk as an endogenous outcome of the interaction between market liquidity risk, solvency risk, and the funding structure of banks. To assess the overall impact of different mix of capital and liquidity, we simulate the framework under a severe but plausible macro scenario for different balance-sheet structures. Of particular interest, we find that (1) capital has a decreasing marginal effect on systemic risk, (2) increasing capital alone is much less effective in reducing liquidity risk than solvency risk, (3) high liquid asset holdings reduce the marginal effect of increasing short term liability on systemic risk, and (4) changing liquid asset holdings has little effect on systemic risk when short term liability is sufficiently low. |
| Keywords: | Financial stability; Financial system regulation and policies |
| JEL: | G21 C15 C81 E44 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-29&r=reg |
| By: | Stéphane Jacobzone; Faye Steiner; Erika Lopez Ponton; Emmanuel Job |
| Abstract: | This Working Paper presents preliminary analytical estimates using the 1998 and 2005 surveys of indicators of systems for the management of regulatory quality. Two broad dimensions are found in regulatory management systems using Factor Analysis, and Principal Component Analysis. The first reflects an integrated approach to ex ante assessment, with the use of tools such as formal consultation and regulatory impact analysis as well as institutions for regulatory oversight, training and capacity building. The second focuses on the stock of regulation, with administrative simplification, streamlining licences and permits, etc. These data are correlated with other available datasets on regulatory frameworks, including the OECD indicators of Product Market Regulations, subsets of the Doing business and Worldwide Governance Indicators (WGI) from the World Bank and the Global Competitiveness Index (GCI) from the World Economic Forum. Finally, the report presents some preliminary regressions with reduced forms, including fixed and random effects, linking the indicators to macroeconomic indicators. The findings tend to support the view that improvements in regulatory management system quality yield significant economic benefits. |
| Date: | 2010–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:oec:govaaa:17-en&r=reg |
| By: | Christian A. L. Hilber; Frédéric Robert-Nicoud |
| Abstract: | We model residential land use constraints as the outcome of a political economy gamebetween owners of developed and owners of undeveloped land. Land use constraints benefitthe former group (via increasing property prices) but hurt the latter (via increasingdevelopment costs). More desirable locations are more developed and, as a consequence ofpolitical economy forces, more regulated. Using an IV approach that directly follows fromour model we find strong and robust support for our predictions. The data provide weak or nosupport for alternative hypotheses whereby regulations reflect the wishes of the majority ofhouseholds or efficiency motives. |
| Keywords: | Land use regulations, zoning, land ownership, housing supply |
| JEL: | H7 Q15 R52 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:cep:sercdp:0038&r=reg |
| By: | David A. Moss (Harvard Business School, Business, Government and the International Economy Unit) |
| Abstract: | It has been said that deregulation was an important source of the recent financial crisis. It may be more accurate, however, to say that a deregulatory mindset was an important source of the crisis - a mindset that, to a very significant extent, grew out of profound changes in academic thinking about the role of government. As scholars of political economy quietly shifted their focus from market failure to government failure over the second half of the twentieth century, they set the stage for a revolution in both government and markets, the full ramifications of which are still only beginning to be understood. This intellectual sea-change generated some positive effects, but also some negative ones, including (it seems) an excessively negative impression of the capacity of government to address problems in the marketplace. Today, as we consider the need for new regulation, particularly in the wake of the financial crisis, another fundamental shift in academic thinking about the role of government may be required - involving nothing less than a reversal of the prevailing null hypothesis in the study of political economy. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:10-080&r=reg |
| By: | Jacobo Pastor García Villarreal |
| Abstract: | This report is part of the OECD-Mexico initiative “Strengthening of Economic Competition and Regulatory Improvement for Competitiveness”. It summarises the findings of several case studies on best practices to promote regulatory reform and entrepreneurship at the sub-national level. It has benefited from the participation of three Mexican states (Baja California, Jalisco, and Puebla), as well as of three provinces from other countries, British Columbia (Canada), Catalonia (Spain), and Piemonte (Italy). By including both, Mexican and international experiences, this report derives practical lessons for sub-national governments to improve their regulatory quality and create dynamic business environments. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:oec:govaaa:18-en&r=reg |
| By: | Ojo, Marianne |
| Abstract: | Rescue cases involving guarantees (contrasted with restructuring cases) during the recent Financial Crisis, have illustrated the prominent position which the goal of promoting financial stability has assumed over that of the prevention or limitation of possible distortions of competition which may arise when granting State aid. The recent Financial Crisis has also illustrated how the traditional role of central banks has been extended to incorporate more innovative roles. The reduction of interest rates by central banks to all time lows – along with other unprecedented actions which have been undertaken by central banks, as evidenced by the recent Financial Crisis, have been regarded as „extensions of traditional methods of operation which have resulted in a new territory in which tools have been implemented in very new ways.“ As well as providing an analysis of how the traditional role of central banks has evolved through the duration of the Financial Crisis, this paper attempts to highlight how far central banks and governments should intervene and how far distortions of competition should be permitted during periods of financial crises. |
| Keywords: | competition; central banks; recapitalisation; stability; regulation; financial crises; fundamentally sound financial institutions; macro prudential; Basel III; systemic risk; supervision; liquidity; state aid; monetary policy |
| JEL: | K2 E58 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26605&r=reg |
| By: | Mirella Damiani |
| Abstract: | The literature aimed at exploring labor regulation and cross-country comparisons has left partly unexplored two major points: the first is the influence of employees within managerial processes, through the channel of employee representation at firm level. The second point concerns potential complementarities or substitutions between patterns of ownership or shareholder protection and labour regulation. The paper offers a critical overview of some selected studies that have started at filling these gaps by considering labour institutions for their influence on the ‘balance’ of power inside the firm, between owners, management, and employees. Firstly, it examines the literature which gives a central importance to the effects of legal origins on labour regulation and labour market outcomes. Secondly, it reviews the studies which focus on informal rules and de-facto practices and favour a stakeholder approach. A particular concern is paid to the overall consequences of the different institutional setups in the perspective of the “varieties of capitalism”, in which systems of labour regulation exert their function by strategical interactions with other institutions. Finally, it presents recent theoretical and empirical studies centring on employee investments in firm-specific human capital and on institutional devices which have the effect of tying the fortunes of the employee together with those of the firm. In the varieties of capitalism characterised by general skills and patterns of radical innovation, it is emphasized the internal governance exerted by ‘critical employees’. In economies with firm and industry specific skills, cooperation of employees with management in more shareholder value oriented firm (‘negotiated shareholder system’) are the more successful roads. |
| Keywords: | Stakeholders, Corporate Governance, Varieties of Capitalism. |
| JEL: | J50 G30 |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pia:wpaper:76/2010&r=reg |
| By: | Saltoglu, Burak; Yenilmez, Taylan |
| Abstract: | A financial network model, where the coded identity of the counterparties of every trade is known, is applied to both stable and crisis periods in a large and liquid overnight repo market in an emerging market economy. We have analyzed the financial crisis by using various network investigation tools such as links, interconnectivity, and reciprocity. In addition, we proposed a centrality measure to monitor and detect the ‘systemically important financial institution’ in the financial system. We have shown that our measure gives strong signals much before the crisis. |
| Keywords: | systemic risk; financial regulation; financial crisis; BASEL III; systemically important financial institution; Turkey; IMF |
| JEL: | D53 C45 F47 D85 C01 |
| Date: | 2010–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26684&r=reg |
| By: | Reinhard Madlener (Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University); Ilja Neustadt (Socioeconomic Institute, University of Zurich) |
| Abstract: | In a perfectly competitive market with a possibility of technological innovation we contrast guaranteed feed-in tariffs for electricity from renewables and tradable green certificates from a dynamic efficiency and social welfare point of view. Specifically, we model decisions about the technological innovation with convex costs within the framework of a game-theoretic model, and discuss implications for optimal policy design under different assumptions regarding regulatory pre-commitment. We find that for the case of technological innovation with convex costs subsidy policies are preferable over quota-based policies. Further, in terms of dynamic efficiency, no pre-commitment policies are shown to be at least as good as the pre-commitment ones. Thus, a government with a preference for innovation being performed if the achievable cost reduction is high should be in favor of the no pre-commitment regime. |
| Keywords: | Renewable electricity, Feed-in tariffs, Regulatory pre-commitment, Tradable green certificates, Quota target, Innovation, Energy policy |
| JEL: | Q42 Q48 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:1010&r=reg |