This paper provides new evidence on the relationship between mobile money regulation and usage. It combines data from the Mobile Money Regulatory Index, a comprehensive assessment of mobile money regulations, and the Global Findex Database 2017. The analysis covers almost 50,000 individuals across 46 countries and finds compelling evidence that an enabling regulatory framework is strongly associated with higher mobile money usage. There are a number of components within a regulatory framework that are linked to the use of mobile money, including: allowing non-banks to provide mobile money; permitting international money transfers; a comprehensive consumer protection framework; giving mobile money providers flexibility to appoint individual agents; not imposing strict limits, taxes or price controls on mobile money transactions; allowing non-banks to have direct access to retail payment settlement infrastructure, and; allowing providers to earn and utilise interest on mobile money trust accounts. The results also suggest that an enabling regulatory framework has a stronger association with mobile money usage amongst women compared to men, and amongst the poorest segments of a country’s population.
{"title":"Exploring the Relationship Between Mobile Money Regulation and Usage","authors":"Kalvin Bahia, M. Sánchez-Vidal, P. Taberner","doi":"10.2139/ssrn.3748287","DOIUrl":"https://doi.org/10.2139/ssrn.3748287","url":null,"abstract":"This paper provides new evidence on the relationship between mobile money regulation and usage. It combines data from the Mobile Money Regulatory Index, a comprehensive assessment of mobile money regulations, and the Global Findex Database 2017. The analysis covers almost 50,000 individuals across 46 countries and finds compelling evidence that an enabling regulatory framework is strongly associated with higher mobile money usage. There are a number of components within a regulatory framework that are linked to the use of mobile money, including: allowing non-banks to provide mobile money; permitting international money transfers; a comprehensive consumer protection framework; giving mobile money providers flexibility to appoint individual agents; not imposing strict limits, taxes or price controls on mobile money transactions; allowing non-banks to have direct access to retail payment settlement infrastructure, and; allowing providers to earn and utilise interest on mobile money trust accounts. The results also suggest that an enabling regulatory framework has a stronger association with mobile money usage amongst women compared to men, and amongst the poorest segments of a country’s population.","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"80 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85760439","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study how expectations of fund flows causally affect fund performance by exploiting a quasi-natural experiment in the Australian pension system where an unexpected policy change temporarily allowed fund withdrawals from a pre-specified date in the future. Using fractions of young members, middle-aged members, and government co-contributions for low income earners as instrumental variables, we find an insignificant effect of expected fund outflows on fund performance. A potential explanation is that Australian superannuation funds preemptively engage in liquidity management in response to changes in expectations of future fund flows and that this helps to limit direct and indirect costs in the rebalancing process.
{"title":"Liquidity Shocks and Pension Fund Performance: Evidence From the Early Release Scheme","authors":"James Brugler, Minsoo Kim, Zhuo Zhong","doi":"10.2139/ssrn.3745990","DOIUrl":"https://doi.org/10.2139/ssrn.3745990","url":null,"abstract":"We study how expectations of fund flows causally affect fund performance by exploiting a quasi-natural experiment in the Australian pension system where an unexpected policy change temporarily allowed fund withdrawals from a pre-specified date in the future. Using fractions of young members, middle-aged members, and government co-contributions for low income earners as instrumental variables, we find an insignificant effect of expected fund outflows on fund performance. A potential explanation is that Australian superannuation funds preemptively engage in liquidity management in response to changes in expectations of future fund flows and that this helps to limit direct and indirect costs in the rebalancing process.","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"117 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74449025","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article evaluates the post-2008 legal/regulatory framework of financial consumer protection in the U.S. and the E.U. and argues that financial consumer protection is not sufficiently robust to have a significantly positive impact on financial stability. To turn this around, the article proposes a novel analysis of financial consumer protection and the strengthening of financial consumer protection with a broader, systemic stability-based argument, rather than a narrower, primarily competition law-based argument. This article proposes a more encompassing consumer protection definition, a catalog of chief areas and tools, and a more interdisciplinary approach in this new era that emphasizes the importance of financial education and international collaboration.
{"title":"Financial Consumer Protection in the U.S. and the E.U.: A Preventive Building Block of Banking Bailout Law","authors":"V. Blazsek","doi":"10.2139/ssrn.3743771","DOIUrl":"https://doi.org/10.2139/ssrn.3743771","url":null,"abstract":"This article evaluates the post-2008 legal/regulatory framework of financial consumer protection in the U.S. and the E.U. and argues that financial consumer protection is not sufficiently robust to have a significantly positive impact on financial stability. To turn this around, the article proposes a novel analysis of financial consumer protection and the strengthening of financial consumer protection with a broader, systemic stability-based argument, rather than a narrower, primarily competition law-based argument. This article proposes a more encompassing consumer protection definition, a catalog of chief areas and tools, and a more interdisciplinary approach in this new era that emphasizes the importance of financial education and international collaboration.","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"77 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79902513","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article presents a systematic consideration of how administrative law doctrines apply to banking supervision, an unusual form of administrative practice. First, it describes the rationales for, and process of, bank supervision. Key here is an explanation of why financial regulation that is optimal in a narrow efficiency sense includes a supervisory function entailing considerable discretion. The relative opacity of some important features of this administrative practice has made it difficult for legal scholars to obtain a sufficiently informed understanding of the process to evaluate it against relevant legal norms and standards. Second, the article uses recent administrative law arguments lodged by banking interests against key supervisory practices as the springboard for an analysis of how our largely “trans-substantive” administrative law can be problematic in the context of specific mandates given by Congress to administrative agencies. It argues that courts considering how administrative law doctrine applies to agency practices must consider more fully the substantive law the underpins the mission and organization of the agency. In the context of banking supervision, Congress has regularly included in its amendments to banking law clear acknowledgement of the supervisory function, and has at times created expectations for how that function will advance safety and soundness regulation. When these statutory provisions are taken appropriately into account, arguments that supervisory practices are consistent with administrative law requirements are considerably strengthened. Third, the article demonstrates how even a more tailored application of contemporary administrative law doctrines would miss a critical feature of banking supervision – that it is premised on an ongoing relationship between banks and supervisors. Judicial review of agency action usually focuses on discrete agency actions, thereby eliding this critical fact. As a result, administrative law doctrines such as the “practically binding” test for agency guidance peculiarly inapposite. The last part of the article offers a tentative proposal for shifting the administrative law review of supervisory actions to focus on the iterative nature of the supervisory relationship.
{"title":"Bank Supervision and Administrative Law","authors":"D. Tarullo","doi":"10.2139/ssrn.3743404","DOIUrl":"https://doi.org/10.2139/ssrn.3743404","url":null,"abstract":"This article presents a systematic consideration of how administrative law doctrines apply to banking supervision, an unusual form of administrative practice. First, it describes the rationales for, and process of, bank supervision. Key here is an explanation of why financial regulation that is optimal in a narrow efficiency sense includes a supervisory function entailing considerable discretion. The relative opacity of some important features of this administrative practice has made it difficult for legal scholars to obtain a sufficiently informed understanding of the process to evaluate it against relevant legal norms and standards. Second, the article uses recent administrative law arguments lodged by banking interests against key supervisory practices as the springboard for an analysis of how our largely “trans-substantive” administrative law can be problematic in the context of specific mandates given by Congress to administrative agencies. It argues that courts considering how administrative law doctrine applies to agency practices must consider more fully the substantive law the underpins the mission and organization of the agency. In the context of banking supervision, Congress has regularly included in its amendments to banking law clear acknowledgement of the supervisory function, and has at times created expectations for how that function will advance safety and soundness regulation. When these statutory provisions are taken appropriately into account, arguments that supervisory practices are consistent with administrative law requirements are considerably strengthened. Third, the article demonstrates how even a more tailored application of contemporary administrative law doctrines would miss a critical feature of banking supervision – that it is premised on an ongoing relationship between banks and supervisors. Judicial review of agency action usually focuses on discrete agency actions, thereby eliding this critical fact. As a result, administrative law doctrines such as the “practically binding” test for agency guidance peculiarly inapposite. The last part of the article offers a tentative proposal for shifting the administrative law review of supervisory actions to focus on the iterative nature of the supervisory relationship.","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"52 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89926137","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-11-24DOI: 10.1146/ANNUREV-FINANCIAL-100520-100321
A. Menkveld, Guillaume Vuillemey
Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007–2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets ...
{"title":"The Economics of Central Clearing","authors":"A. Menkveld, Guillaume Vuillemey","doi":"10.1146/ANNUREV-FINANCIAL-100520-100321","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-100520-100321","url":null,"abstract":"Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007–2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets ...","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"13 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81325857","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study how universal banking, that is, allowing banks to take equity positions in firms to which they lend, affects optimal financing structure and social welfare. Financing a firm through equity holding can improve a bank’s risk-taking incentive in restructuring the firm in bad times, but it is costly due to information asymmetry about the firm payoff in good times. We show a small increase in firm quality or bank capital ratio can cause the financing contract to switch from too much equity holding to too much debt financing, resulting in substantial welfare loss. Therefore, an equity holding restriction aiming at limiting banks’ excessive risk-taking may reduce welfare by overcorrecting the problem, and the optimal capital ratio may inevitably induce too much risk-taking.
{"title":"Universal Banking, Optimal Financing Structure, and Banking Regulations","authors":"Chun Chang, Xiaoming Li, Yiyao Wang","doi":"10.2139/ssrn.3733558","DOIUrl":"https://doi.org/10.2139/ssrn.3733558","url":null,"abstract":"We study how universal banking, that is, allowing banks to take equity positions in firms to which they lend, affects optimal financing structure and social welfare. Financing a firm through equity holding can improve a bank’s risk-taking incentive in restructuring the firm in bad times, but it is costly due to information asymmetry about the firm payoff in good times. We show a small increase in firm quality or bank capital ratio can cause the financing contract to switch from too much equity holding to too much debt financing, resulting in substantial welfare loss. Therefore, an equity holding restriction aiming at limiting banks’ excessive risk-taking may reduce welfare by overcorrecting the problem, and the optimal capital ratio may inevitably induce too much risk-taking.<br>","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"156 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73805584","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We build a benchmark for AAA-rated tranches of Collateralized Loan Obligations (CLOs) using Business Development Companies (BDCs), which hold a diversified portfolio of loans as CLOs do. However, BDCs are publicly listed, and their share price, equity volatility and borrowing cost are observable. Furthermore, BDCs' debt is not rated as AAA. Applying a structural model to BDCs, we extract market-implied correlation in their loan portfolio, compare spreads on CLO tranches and BDC-implied benchmark, and find that observed large credit spreads on CLO senior tranches after the financial crisis are a fair reflection of the systematic risk of correlated loan defaults.
{"title":"A Benchmark for Collateralized Loan Obligations","authors":"Redouane Elkamhi, Ruicong Li, Yoshio Nozawa","doi":"10.2139/ssrn.3732614","DOIUrl":"https://doi.org/10.2139/ssrn.3732614","url":null,"abstract":"We build a benchmark for AAA-rated tranches of Collateralized Loan Obligations (CLOs) using Business Development Companies (BDCs), which hold a diversified portfolio of loans as CLOs do. However, BDCs are publicly listed, and their share price, equity volatility and borrowing cost are observable. Furthermore, BDCs' debt is not rated as AAA. Applying a structural model to BDCs, we extract market-implied correlation in their loan portfolio, compare spreads on CLO tranches and BDC-implied benchmark, and find that observed large credit spreads on CLO senior tranches after the financial crisis are a fair reflection of the systematic risk of correlated loan defaults.","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"41 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74430644","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a novel security-level data from SEC on US tri-party repo, this paper investigates how trading relationship impacts liquidity provision within the dealer-fund repo network. This paper documents a unique repo rate dynamic: in normal times, funds charge a premium to dealers with whom they have the strongest trading relationship; in market-wide liquidity shocks, these dealers are rewarded with lower repo rate markup and better immediacy. I exploit the 2016 Money Market Fund Reform as an exogenous liquidity shock to establish a liquidity insurance mechanism. As liquidity insurers are not easily replaceable, shown in the unexpected liquidation case of Charles Schwab Sweep Funds, costly search incentivizes dealers to engage in such stable quid pro quo relationship with money market funds.
{"title":"Quid Pro Quo: Liquidity Insurance in Dealer-Fund Network","authors":"Luming Chen","doi":"10.2139/ssrn.3731615","DOIUrl":"https://doi.org/10.2139/ssrn.3731615","url":null,"abstract":"Using a novel security-level data from SEC on US tri-party repo, this paper investigates how trading relationship impacts liquidity provision within the dealer-fund repo network. This paper documents a unique repo rate dynamic: in normal times, funds charge a premium to dealers with whom they have the strongest trading relationship; in market-wide liquidity shocks, these dealers are rewarded with lower repo rate markup and better immediacy. I exploit the 2016 Money Market Fund Reform as an exogenous liquidity shock to establish a liquidity insurance mechanism. As liquidity insurers are not easily replaceable, shown in the unexpected liquidation case of Charles Schwab Sweep Funds, costly search incentivizes dealers to engage in such stable quid pro quo relationship with money market funds.","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"16 11","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91424714","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Banks are not immune from COVID-19. The economic downturn may drive some banks to the point of non-viability (PONV). If so, is the resolution regime in the Euro-area ready to respond?
No, for banks may not have the right amount of the right kind of liabilities to make bail-in work. That could lead to a banking crisis.
The Euro area can avoid this risk, by arranging now for a recap later. This would plug the gap between what the failing bank has and what it would need to make bail-in work. To do so, banks would pay – possibly via the contributions they make to the Single Resolution Fund – a commitment fee to a European backstop authority for a mandatory, system-wide note issuance facility. This would compel each bank, as it reached the PONV, to issue to the backstop, and the backstop to purchase from the bank, the obligations the failing bank needs in order to make bail-in work. Such obligations would take the form of “senior-most” non-preferred debt, and bail-in would stop with such debt. That would allow the SRB to use the bail-in tool to resolve the failed bank, reopen it and run it under a solvent wind down strategy.
That protects counterparties and customers and ensures the continuity of critical economic functions. It also keeps investors at risk and promotes market discipline. Above all, it preserves financial stability.
{"title":"Plug the Gap: Make Resolution Ready for Corona","authors":"T. Huertas","doi":"10.2139/ssrn.3734866","DOIUrl":"https://doi.org/10.2139/ssrn.3734866","url":null,"abstract":"Banks are not immune from COVID-19. The economic downturn may drive some banks to the point of non-viability (PONV). If so, is the resolution regime in the Euro-area ready to respond?<br><br>No, for banks may not have the right amount of the right kind of liabilities to make bail-in work. That could lead to a banking crisis.<br><br>The Euro area can avoid this risk, by arranging now for a recap later. This would plug the gap between what the failing bank has and what it would need to make bail-in work. To do so, banks would pay – possibly via the contributions they make to the Single Resolution Fund – a commitment fee to a European backstop authority for a mandatory, system-wide note issuance facility. This would compel each bank, as it reached the PONV, to issue to the backstop, and the backstop to purchase from the bank, the obligations the failing bank needs in order to make bail-in work. Such obligations would take the form of “senior-most” non-preferred debt, and bail-in would stop with such debt. That would allow the SRB to use the bail-in tool to resolve the failed bank, reopen it and run it under a solvent wind down strategy.<br> <br>That protects counterparties and customers and ensures the continuity of critical economic functions. It also keeps investors at risk and promotes market discipline. Above all, it preserves financial stability.","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82474860","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study investigates the optimal asset allocation of a financial institution subject to liquidity risks and whose customers are free to withdraw their capital-guaranteed financial contracts at any time. Accounting for constraints on the solvency of the institution, we present a general optimization problem and provide a dynamic programming principle for the optimal dynamic investment strategies. Furthermore, we consider an explicit context, including the interest rate and credit intensity fluctuations, and show, by numerical results, that the optimal strategy improves the solvency and the asset returns of the institution compared to the baseline asset allocation.
{"title":"Optimal Asset Allocation Subject to Liquidity and Withdrawal Risks","authors":"Areski Cousin, Y. Jiao, C. Robert, O. Zerbib","doi":"10.2139/ssrn.3730057","DOIUrl":"https://doi.org/10.2139/ssrn.3730057","url":null,"abstract":"This study investigates the optimal asset allocation of a financial institution subject to liquidity risks and whose customers are free to withdraw their capital-guaranteed financial contracts at any time. Accounting for constraints on the solvency of the institution, we present a general optimization problem and provide a dynamic programming principle for the optimal dynamic investment strategies. Furthermore, we consider an explicit context, including the interest rate and credit intensity fluctuations, and show, by numerical results, that the optimal strategy improves the solvency and the asset returns of the institution compared to the baseline asset allocation.","PeriodicalId":20999,"journal":{"name":"Regulation of Financial Institutions eJournal","volume":"17 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86583825","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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