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on Regulation |
| By: | Thilo Pausch (Deutsche Bundesbank Frankfurt); Peter Welzel (University of Augsburg, Department of Economics) |
| Abstract: | We integrate Basel II (and III) regulations into the industrial organization approach to banking and analyze lending behavior and risk sensitivity of a risk-neutral bank. The bank is exposed to credit risk and may use credit default swaps (CDS) for hedging purposes. Regulation is found to induce the risk-neutral bank to behave in a more risk-sensitive way: Compared to a situation without regulation the optimal volume of loans decreases more as the riskiness of loans increases. CDS trading is found to interact with the former effect when regulation accepts CDS as an instrument to mitigate credit risk. Under the Substitution Approach in Basel II (and III) a risk-neutral bank will over-, fully or under-hedge its total exposure to credit risk conditional on the CDS price being downward biased, unbiased or upward biased. This interaction promotes the intention of the Basel II (and III) regulations to “strengthen the soundness and stability of banks”, since capital adequacy regulation without accounting for the risk-mitigating effect of CDS trading would stimulate a risk-neutral bank to take more extreme positions in the CDS market. |
| Keywords: | banking, regulation, credit risk |
| JEL: | G21 G28 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:aug:augsbe:0316&r=reg |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros); Jesús Saurina (Banco de España) |
| Abstract: | We provide a critical assessment of the countercyclical capital buffer in the new regulatory framework known as Basel III, which is based on the deviation of the credit-to-GDP ratio with respect to its trend. We argue that a mechanical application of the buffer would tend to reduce capital requirements when GDP growth is high and increase them when GDP growth is low, so it may end up exacerbating the inherent pro-cyclicality of risk-sensitive bank capital regulation. We also note that Basel III does not address pro-cyclicality in any other way. We propose a fully rule-based smoothing of minimum capital requirements based on GDP growth. |
| Keywords: | Bank capital regulation, Basel III, Pro-cyclicality, Business cycles, Credit crunch. |
| JEL: | E32 G28 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2011_1102&r=reg |
| By: | Mohan, Rakesh (Asian Development Bank Institute) |
| Abstract: | In 2008–09 the world experienced the most severe financial and economic crisis since the Great Depression. The global financial crisis is attributed to a variety of factors, such as developments in the subprime mortgage sector, excessive leverage, lax financial regulation and supervision, and global macroeconomic imbalances. At a fundamental level, however, the crisis also reflects the effects of a long period of excessively loose monetary policy in the major advanced economies during the early part of this past decade. The global financial crisis has led to a new wave of thinking on all issues related to both monetary policy and financial regulation. The practice of both monetary policy and financial regulation had tended to become too formula bound and hence predictable. While these new principles are being debated, it is important to realize that in the face of unexpected developments that always arise in the financial sector, there is an important role for the exercise of judgment by both monetary authorities and financial regulators. Whereas considerable progress has been achieved on the principles governing this regulatory overhaul, very significant challenges remain on the implementation issues that will arise as a new regime takes hold globally. |
| Keywords: | global financial crisis; monetary policy; financial regulation; regulation financial institutions; regulatory reform |
| JEL: | G18 |
| Date: | 2011–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0271&r=reg |
| By: | Matthew A. Cole (Department of Economics, University of Birmingham, UK); Robert J.R. Elliott (Department of Economics, University of Birmingham, UK); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University) |
| Abstract: | In recent years there has been a dramatic increase in the number of firms shifting stages of their production processes overseas. In this paper we investigate whether firms outsource the dirtier stages of production to minimise domestic environmental regulation costs – a process broadly consistent with the pollution haven hypothesis. We develop a theoretical model of environmental outsourcing that focuses on the roles played by firm size and productivity, transport costs and environmental regulations. We test the model's predictions using a firm-level data set for Japan and do find evidence of an 'environmental outsourcing' effect. |
| Keywords: | Environmental regulations, trade, outsourcing, outsourcing, firm-level. |
| JEL: | F18 L51 L60 Q56 R3 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2011-12&r=reg |
| By: | Angelini, P.; Clerc, L.; Cúrdia, V.; Gambacorta, L.; Gerali, A.; Locarno, A.; Motto, R.; Roeger, W.; Van den Heuvel, S.; Vlcek, J. |
| Abstract: | We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of the reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b). |
| Keywords: | Basel III, countercyclical capital buffers, financial (in)stability, procyclicality, macroprudential policy. |
| JEL: | E44 E61 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:323&r=reg |
| By: | Fabio Manenti (Università di Padova); Antonio Sciala' (Universita' Roma Tre) |
| Abstract: | This paper presents a model of competition between an incumbent and an entrant firm in telecommunications. The entrant has the option to enter the market with or without having preliminary invested in its own infrastructure; in case of facility based entry, the entrant has also the option to invest in the provision of enhanced services. In case of resale based entry the entrant needs access to the incumbent network. Unlike the rival, the incumbent has always the option to upgrade the existing network to provide advanced services. We study the impact of access regulation on the type of entry and on firms' investments. Without regulation, we find that the incumbent sets the access charge to prevent resale based entry and this overstimulates rival's investment that may turn out to be socially inefficient. Access regulation may discourage welfare enhancing investments, thus also inducing a socially inefficient outcome. We extend the model to account for negotiated interconnection in case of facilities based entry. |
| Keywords: | telecommunications, ladder of investment, access regulation, interconnection. |
| JEL: | L86 L96 L51 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0120&r=reg |
| By: | Mirella Damiani; Fabrizio Pompei; Andrea Ricci |
| Abstract: | The present study examines cross-national and sectoral differences in Total Factor Productivity (TFP) in fourteen European countries and ten sectors from 1995 to 2007. The main aim is to ascertain the role of employment protection of temporary contracts on TFP by estimating their effects with a “difference-in-difference” approach. Results show that deregulation of temporary contracts negatively influences the growth rates of TFP in European economies and that, within sectoral analysis, the role of this liberalisation is greater in industries where firms are more used to opening short-term positions. By contrast, in our observation period, restrictions on regular jobs do not cause significant effects on TFP, whereas limited regulation of product markets and higher R&D expenses positively affect efficiency growth. |
| Keywords: | productivity, labour regulation. |
| JEL: | O40 O43 O47 J58 |
| Date: | 2011–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:pia:wpaper:87/2011&r=reg |
| By: | Benjamin Pakula (University of Giessen); Georg Götz (University of Giessen) |
| Abstract: | This paper analyses the incentives to upgrade input quality in vertically related (network) industries. Upstream investments have a biased effect on the downstream companies and lead to vertical product differentiation. Different vertical structures such as vertical integration, ownership and legal unbundling lead to different investments. We find that, without regulation, vertical integration and legal unbundling regimes provide highest investment incentives and lead to highest welfare. However, we also find foreclosure in the downstream market if the potential degree of horizontal product differentiation of the entrant is low. Under ownership unbundling, investment incentives are lower but there is never foreclosure of the entrant since this would worsen double marginalisation. When the network operator is subject to a break-even regulation, the investment incentives are crowded out under legal and ownership unbundling whereas they remain nearly unchanged under vertical integration. Welfare and co umer surplus decrease under legal unbundling, but increase under the two other regimes. |
| Keywords: | Vertical Integration, Investment, Foreclosure, Regulation |
| JEL: | D2 D4 L43 L51 L92 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201109&r=reg |
| By: | Carney, Richard W. (Asian Development Bank Institute) |
| Abstract: | Is the harmonization of financial regulatory regimes possible in East Asia? Focusing on corporate governance, which many see as a critical part of the 1997 Asian financial crisis, and which is also seen as unresponsive to calls for change, this paper argues that such harmonization is possible, but that it will not be according to the “best practices” advocated by the International Monetary Fund, World Bank, Organisation for Economic Co-operation and Development, and other international organizations. At present, actors generally feign compliance with these international rules and standards. But this creates potential long-term problems by allowing distortions to persist and accumulate over time. By identifying the key actors that determine regulatory outcomes, this paper points to an alternative regulatory framework that would be adopted more comprehensively. This alternative framework is a compromise between the “best practices” advocated by international organizations, and the domestic political realities of East Asia. |
| Keywords: | financial regulatory regimes; financial regulation; harmonization financial regulation; corporate governance |
| JEL: | G32 G34 G38 P48 |
| Date: | 2011–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0269&r=reg |
| By: | Manmohan Singh |
| Abstract: | Recent regulatory efforts, especially in the U.S. and Europe, are aimed at reducing moral hazard so that the next financial crisis is not bailed out by tax payers. This paper looks at the possibility that central counterparties (CCPs) may be too-big-to-fail entities in the making. The present regulatory and reform efforts may not remove the systemic risk from OTC derivatives but rather shift them from banks to CCPs. Under the present regulatory overhaul, the OTC derivative market could become more fragmented. Furthermore, another taxpayer bailout cannot be ruled out. A reexamination of the two key issues of (i) the interoperability of CCPs, and (ii) the cost of moving to CCPs with access to central bank funding, indicates that the proposed changes may not provide the best solution. The paper suggests that a tax on derivative liabilities could make the OTC derivatives market safer, particularly in the transition to a stable clearing infrastructure. It also suggests reconsideration of a "public utility" model for the OTC market infrastructure. |
| Date: | 2011–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/66&r=reg |
| By: | Russell Pittman (Economic Analysis Group, Antitrust Division, U.S. Department of Justice) |
| Abstract: | The Russian economy relies on the Russian freight railways to an extraordinary degree. In 2001, after years of debate, the Russian government adopted an ambitious plan to transform this vertically integrated, government owned monopoly into a system that would rely more on private investment and competition and less on government ownership and regulation. This paper examines the state of the industry after ten years of reforms, with a focus on competition, tariffs, and private sector participation. Much remains to be decided, in particular the question of whether Russia will settle on its own unique model of railways restructuring or will move in the direction of one of the three standard models seen in other countries: vertical separation as in the UK and Sweden, third party access as in Germany and France, or horizontal separation, as in the US, Canada, and Mexico. |
| Keywords: | freight railways, restructuring, competition, Russian Federation, vertical separation, third party access, horizontal separation |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:doj:eagpap:201103&r=reg |
| By: | William Gillespie (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Oliver M. Richard |
| Abstract: | Most of the major carriers worldwide have joined one of three international airline alliances. The U.S. Department of Transportation has granted immunity from the U.S. antitrust laws to many carriers within these alliances. This article assesses the competitive effects and efficiencies associated with such grants. A grant of antitrust immunity to carriers in an alliance reduces competition in routes where these carriers offer competing flights, and the data show that fares paid by passengers for travel in non-stop trans-Atlantic flights are higher in routes with fewer independent competitors. The data also show that the alliances can produce pricing efficiencies for trans-Atlantic passengers who travel with connecting itineraries, but antitrust immunity within an alliance is not necessary to achieve such efficiencies. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:doj:eagpap:201101&r=reg |
| By: | D. Dragone; L. Lambertini; A. Palestini |
| Abstract: | We investigate the possibility of using public firms to regulate polluting emissions in a Cournot oligopoly where production takes place at constant returns to scale and entails a negative environmental externality. We model the problem as a differential game and investigate (i) the Cournot-Nash game among profit-seeking firms; (ii) the Markov Perfect Nash equilibrium under social planning, where the industry output is entirely controlled by a benevolent planner aiming at the maximisation of social welfare; and (iii) the Markov Perfect Nash equilibrium in a mixed setup where at least one firm is public, while the others remain profit-seeking agents. Our analysis identifies the conditions whereby having a mixed market as a regulatory instrument suffices to drive the industry to the same output, externality and social welfare as under planning, both along the optimal path and in steady state. |
| JEL: | C73 D43 D62 L13 L32 Q50 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp738&r=reg |
| By: | Kumiko Okazaki (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kumiko.okazaki@boj.or.jp)); Masazumi Hattori (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masazumi.hattori@boj.or.jp)); Wataru Takahashi (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: wataru.takahashi@boj.or.jp)) |
| Abstract: | China's banking system reform has made notable progress since 2002. After restoring their balance sheets, Chinese banks have aggressively increased lending and contributed to supporting the country' s economy given the global financial crisis. Thus far, the regulated deposit and lending interest rates, undeveloped capital markets, and restrictions in cross-border capital transactions have given banks an advantage in gaining profits. However, along with the full-blown reform of the economic system toward a market-oriented economy, the conditions protecting banks' profits will change in the future. The experiences of Japanese banks under the financial liberalization that occurred during the 1970s and 1980s indicate how important it is for commercial banks to change their business models in accordance with the fundamental changes in the economy. These experiences may be useful for considering the subsequent reform process of the financial system in China. |
| Keywords: | Banking System Reform, Financial Liberalization, State-owned Commercial Banks, Rent for Banks |
| JEL: | G21 O16 O53 P34 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-06&r=reg |
| By: | Eric Wong (Research Department, Hong Kong Monetary Authority); Ka-fai Li (Research Department, Hong Kong Monetary Authority); Henry Choi (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This study assesses the effectiveness and drawbacks of maximum loan-to-value (LTV) ratios as a macroprudential tool based on Hong Kong¡¦s experience and econometric analyses of panel data from 13 economies. The tool is found to be effective in reducing systemic risk stemming from the boom-and-bust cycle of property markets. Although the tool could impose higher liquidity constraints on homebuyers, empirical evidence shows that mortgage insurance programmes (MIPs) that protect lenders from credit losses on the portion of loans over maximum LTV thresholds can mitigate this drawback without undermining the effectiveness of the tool. This finding indicates the important role of MIPs in enhancing the net benefits of LTV policy. Our estimations also show that the dampening effect of LTV policy on household leverage is more apparent than its effect on property market activities, suggesting that the policy effect may mainly manifest in impacts on household sector leverage. |
| Keywords: | systemic risk, macroprudential policy, loan-to-value ratio, Hong Kong |
| JEL: | G21 G28 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:1101&r=reg |