Pub Date : 2011-09-01DOI: 10.1111/j.1468-0327.2012.00284.x
P. Bolton, F. Samama
This paper argues that there is a Coasean Bargain available to banks, Long-term Investors, and Bank Regulators around a particular form of 'Contingent Capital'. By purchasing rights to issue equity in crisis events at a pre-specified price from Long-term Investors, banks can ensure that they will have sufficient regulatory capital available when they need it most: in a crisis. By selling these rights (effectively, a form of crisis insurance) long-term investors can monetize their counter-cyclical investments strategies in banks and, thus, obtain an adequate return as long-term investors. Bank Regulators, in turn, gain as they can thereby implement a more efficient form of equity-capital regulation. Banks have a special need to maintain their equity-capital base in the event of a crisis. Sovereign Wealth Funds and other long-term investors have proved to be the only available counterparties for banks in crisis times. This is why we argue that these investors must be able to monetize the countercyclical asset-management strategies they are trying to implement by obtaining a higher return on their cash reserves. The form of contingent capital we propose (Capital Access Bond) reflects a balance between investors’ preferences, issuers’ constraints, and regulators' objectives.
{"title":"Capital Access Bonds: Contingent Capital with an Option to Convert","authors":"P. Bolton, F. Samama","doi":"10.1111/j.1468-0327.2012.00284.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2012.00284.x","url":null,"abstract":"This paper argues that there is a Coasean Bargain available to banks, Long-term Investors, and Bank Regulators around a particular form of 'Contingent Capital'. By purchasing rights to issue equity in crisis events at a pre-specified price from Long-term Investors, banks can ensure that they will have sufficient regulatory capital available when they need it most: in a crisis. By selling these rights (effectively, a form of crisis insurance) long-term investors can monetize their counter-cyclical investments strategies in banks and, thus, obtain an adequate return as long-term investors. Bank Regulators, in turn, gain as they can thereby implement a more efficient form of equity-capital regulation. Banks have a special need to maintain their equity-capital base in the event of a crisis. Sovereign Wealth Funds and other long-term investors have proved to be the only available counterparties for banks in crisis times. This is why we argue that these investors must be able to monetize the countercyclical asset-management strategies they are trying to implement by obtaining a higher return on their cash reserves. The form of contingent capital we propose (Capital Access Bond) reflects a balance between investors’ preferences, issuers’ constraints, and regulators' objectives.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127563581","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 : 2011-07-01DOI: 10.1111/j.1468-0327.2011.00266.x
H. Gruber, P. Koutroumpis
Using annual data from 192 countries over the period 1990–2007, we assess the impact of mobile telecommunications on economic growth. We find that this impact is smaller for countries with a low mobile penetration, usually low income countries. While in low income countries the mobile telecommunications contribution to annual GDP growth is 0.11%, for high income countries this is 0.20%. The increasing returns from mobile adoption are also emerging when assessing the impact on productivity growth. To promote mobile telecommunications penetration liberalization policies along with appropriate regulatory frameworks are recommended. Such policies should be pursued more forcefully in cases where serious shortcomings exist.
{"title":"Mobile Telecommunications and the Impact on Economic Development","authors":"H. Gruber, P. Koutroumpis","doi":"10.1111/j.1468-0327.2011.00266.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2011.00266.x","url":null,"abstract":"Using annual data from 192 countries over the period 1990–2007, we assess the impact of mobile telecommunications on economic growth. We find that this impact is smaller for countries with a low mobile penetration, usually low income countries. While in low income countries the mobile telecommunications contribution to annual GDP growth is 0.11%, for high income countries this is 0.20%. The increasing returns from mobile adoption are also emerging when assessing the impact on productivity growth. To promote mobile telecommunications penetration liberalization policies along with appropriate regulatory frameworks are recommended. Such policies should be pursued more forcefully in cases where serious shortcomings exist.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129387484","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}
S. Fahr, Roberto Motto, M. Rostagno, F. Smets, O. Tristani
We evaluate the ECB's monetary policy strategy against some of the underlying economic features of the eurozone, in normal times and during the financial crisis. We show that in the years preceding the crisis the ECB's emphasis on monetary indicators and deliberate avoidance of excessive activism were justified by the underlying macroeconomic conditions that the ECB faced in the eurozone and contributed to avoid more volatile patterns of inflation and economic activity. After the collapse of financial intermediation in late 2008, the strategy of the ECB was to adopt several non‐standard policy measures. According to our quantitative evaluation of the impact of the main non‐standard policies decided in October 2008 and in May 2009, which notably did not include entering commitments regarding the future path of the policy rate, such measures have significantly contributed to preserving price stability and forestalling a more disruptive collapse of the macroeconomy. — Stephan Fahr, Roberto Motto, Massimo Rostagno, Frank Smets and Oreste Tristani
我们根据欧元区在正常时期和金融危机期间的一些基本经济特征来评估欧洲央行的货币政策策略。我们表明，在危机爆发前的几年里，欧洲央行强调货币指标和刻意避免过度激进主义是合理的，因为欧洲央行在欧元区面临着潜在的宏观经济条件，并有助于避免更不稳定的通胀和经济活动模式。2008年末金融中介崩溃后，欧洲央行的策略是采取几项非标准政策措施。根据我们对2008年10月和2009年5月决定的主要非标准政策影响的定量评估，这些政策明显不包括对政策利率未来路径的承诺，这些措施对保持价格稳定和防止宏观经济更具破坏性的崩溃做出了重大贡献。- Stephan Fahr, Roberto Motto, Massimo Rostagno, Frank Smets和Oreste Tristani
{"title":"A Monetary Policy Strategy in Good and Bad Times: Lessons from the Recent Past","authors":"S. Fahr, Roberto Motto, M. Rostagno, F. Smets, O. Tristani","doi":"10.1111/1468-0327.12008","DOIUrl":"https://doi.org/10.1111/1468-0327.12008","url":null,"abstract":"We evaluate the ECB's monetary policy strategy against some of the underlying economic features of the eurozone, in normal times and during the financial crisis. We show that in the years preceding the crisis the ECB's emphasis on monetary indicators and deliberate avoidance of excessive activism were justified by the underlying macroeconomic conditions that the ECB faced in the eurozone and contributed to avoid more volatile patterns of inflation and economic activity. After the collapse of financial intermediation in late 2008, the strategy of the ECB was to adopt several non‐standard policy measures. According to our quantitative evaluation of the impact of the main non‐standard policies decided in October 2008 and in May 2009, which notably did not include entering commitments regarding the future path of the policy rate, such measures have significantly contributed to preserving price stability and forestalling a more disruptive collapse of the macroeconomy.\u0000\u0000— Stephan Fahr, Roberto Motto, Massimo Rostagno, Frank Smets and Oreste Tristani","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131089923","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 : 2011-04-01DOI: 10.1111/j.1468-0327.2011.00260.x
Sigridur Benediktsdottir, Jón Dańıelsson, G. Zoega
The paper draws lessons from the collapse of Iceland’s banking system in October 2008. The rapid expansion of the banking system following its privatization in the early 2000s is explained, as well as the inherent fragility due to the size of the banking system relative to the domestic economy and the central bank’s reserves, market manipulation enabling bank capital to expand rapidly and the weak and understaffed public institutions. Most of Iceland’s banking system was traditionally in state hands but was privatized and sold to politically favoured entities at the turn of the century, with laws and regulations subsequently changed to facilitate the expansion of the banking system. Political connections and the tacit support of the authorities enabled senior bank managers and key shareholders to extract significant private benefits while shifting risk to domestic and foreign taxpayers and foreign creditors. These problems were exacerbated by symptoms of what the paper terms the small country syndrome. The size of the banking sector made the central bank incapable of serving as the lender of last resort. The domestic supervisor, the central bank and the ministries in charge of economic affairs were understaffed and lacking in experience in how to manage a large financial sector. The rapid growth was also ultimately unsustainable due to high levels of leverage and a weak capital base due to both the rapid expansion of balance sheets and lending to finance investment in own shares. The episode demonstrates the importance of closely monitoring rapidly growing financial institutions and even possibly slowing growth when institutions are systemically important. One lesson to be drawn from the crisis relates to the role of politics in a financial crisis. The Icelandic authorities as a matter of policy encouraged the creation of an international banking centre. This involved the privatization and deregulation of the banking system, rules and regulations being relaxed and the neglect of financial supervision. Another lesson is that floating exchange rates can be hazardous in the presence of large capital flows. The central bank raised interest rates during the boom years in order to meet an inflation target. This created an interest rate differential with other countries that encourages a large volume of carry trades and incentivized domestic agents to borrow in foreign currency. Both conspired to create an asset price bubble, excessive currency appreciation and – counter-intuitively – high inflation. The result was that monetary policy as conducted was ineffective at curbing domestic demand. The eventual large depreciation of the currency made a large section of the economy insolvent. Finally, there are lessons about the European passport system in financial services and the common market. The Icelandic banks had the right to set up branches in the European Union by means of the passport on the explicit assumption that home regulators were exercising ad
这份报告从2008年10月冰岛银行体系的崩溃中吸取了教训。本文解释了银行体系在21世纪初私有化后的迅速扩张，以及银行体系相对于国内经济和央行储备的规模所固有的脆弱性，使银行资本迅速扩张的市场操纵以及薄弱和人手不足的公共机构。冰岛的大部分银行系统传统上由国家控制，但在世纪之交被私有化并出售给政治上受欢迎的实体，法律法规随后被修改，以促进银行系统的扩张。政治关系和当局的默许支持，使银行高级管理人员和主要股东能够榨取大量私人利益，同时将风险转移给国内外纳税人和外国债权人。报告所称的小国综合症的症状加剧了这些问题。银行业的规模使央行无法充当最后贷款人。国内监管机构、中央银行和负责经济事务的部门人手不足，缺乏管理大型金融部门的经验。这种快速增长最终也是不可持续的，因为杠杆水平很高，而资产负债表的迅速扩张和为自己的股票投资提供融资的贷款导致资本基础薄弱。这一事件表明，在金融机构具有系统重要性的情况下，密切监控快速增长的金融机构，甚至是可能放缓的增长，是非常重要的。从这场危机中汲取的一个教训与政治在金融危机中的作用有关。作为一项政策，冰岛当局鼓励建立一个国际银行中心。这涉及到银行系统的私有化和解除管制、规则和条例的放松以及对金融监督的忽视。另一个教训是，在存在大量资本流动的情况下，浮动汇率可能是危险的。中央银行在经济繁荣时期提高了利率，以达到通胀目标。这造成了与其他国家的利差，鼓励了大量的套利交易，并激励国内代理人借入外币。两者合谋制造了资产价格泡沫、货币过度升值，以及(与直觉相反的)高通胀。其结果是，货币政策未能有效抑制国内需求。货币的最终大幅贬值使经济的很大一部分资不抵债。最后，欧洲护照制度在金融服务和共同市场方面也有一些教训。冰岛银行有权通过护照在欧盟设立分支机构，前提是明确假设本国监管机构正在实施充分的控制。银行的崩溃让英国和荷兰付出了巨大的代价，这表明当一个成员国可以削弱其他成员国的监管标准时，护照的内在弱点。要使护照系统起作用，家庭主管必须值得信赖。- Sigridur Benediktsdottir, Jon Danielsson和gyylfi Zoega
{"title":"Lessons from a Collapse of a Financial System","authors":"Sigridur Benediktsdottir, Jón Dańıelsson, G. Zoega","doi":"10.1111/j.1468-0327.2011.00260.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2011.00260.x","url":null,"abstract":"The paper draws lessons from the collapse of Iceland’s banking system in October 2008. The rapid expansion of the banking system following its privatization in the early 2000s is explained, as well as the inherent fragility due to the size of the banking system relative to the domestic economy and the central bank’s reserves, market manipulation enabling bank capital to expand rapidly and the weak and understaffed public institutions. Most of Iceland’s banking system was traditionally in state hands but was privatized and sold to politically favoured entities at the turn of the century, with laws and regulations subsequently changed to facilitate the expansion of the banking system. Political connections and the tacit support of the authorities enabled senior bank managers and key shareholders to extract significant private benefits while shifting risk to domestic and foreign taxpayers and foreign creditors. These problems were exacerbated by symptoms of what the paper terms the small country syndrome. The size of the banking sector made the central bank incapable of serving as the lender of last resort. The domestic supervisor, the central bank and the ministries in charge of economic affairs were understaffed and lacking in experience in how to manage a large financial sector. The rapid growth was also ultimately unsustainable due to high levels of leverage and a weak capital base due to both the rapid expansion of balance sheets and lending to finance investment in own shares. The episode demonstrates the importance of closely monitoring rapidly growing financial institutions and even possibly slowing growth when institutions are systemically important. One lesson to be drawn from the crisis relates to the role of politics in a financial crisis. The Icelandic authorities as a matter of policy encouraged the creation of an international banking centre. This involved the privatization and deregulation of the banking system, rules and regulations being relaxed and the neglect of financial supervision. Another lesson is that floating exchange rates can be hazardous in the presence of large capital flows. The central bank raised interest rates during the boom years in order to meet an inflation target. This created an interest rate differential with other countries that encourages a large volume of carry trades and incentivized domestic agents to borrow in foreign currency. Both conspired to create an asset price bubble, excessive currency appreciation and – counter-intuitively – high inflation. The result was that monetary policy as conducted was ineffective at curbing domestic demand. The eventual large depreciation of the currency made a large section of the economy insolvent. Finally, there are lessons about the European passport system in financial services and the common market. The Icelandic banks had the right to set up branches in the European Union by means of the passport on the explicit assumption that home regulators were exercising ad","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"266 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122110432","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 : 2011-01-11DOI: 10.1111/j.1468-0327.2010.00257.x
P. Dolton, Ó. Marcenaro-Gutierrez
Why are teachers paid up to four times as much in some countries compared to others and does it matter? Specifically, is the quality of teachers likely to be higher if they are paid higher up the income distribution in their own country, and are pupil outcomes influenced by how well their teachers are paid? This paper considers the determinants of teachers' salaries across countries and examines the relationship between the real (and relative) level of teacher remuneration and the (internationally) comparable measured performance of secondary school pupils. We use aggregate panel data on 39 countries published by the OECD to model this association. Our results suggest that recruiting higher ability individuals into teaching and permitting scope for quicker salary advancement will have a positive effect on pupil outcomes.
{"title":"If You Pay Peanuts Do You Get Monkeys? A Cross-Country Analysis of Teacher Pay and Pupil Performance","authors":"P. Dolton, Ó. Marcenaro-Gutierrez","doi":"10.1111/j.1468-0327.2010.00257.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2010.00257.x","url":null,"abstract":"Why are teachers paid up to four times as much in some countries compared to others and does it matter? Specifically, is the quality of teachers likely to be higher if they are paid higher up the income distribution in their own country, and are pupil outcomes influenced by how well their teachers are paid? This paper considers the determinants of teachers' salaries across countries and examines the relationship between the real (and relative) level of teacher remuneration and the (internationally) comparable measured performance of secondary school pupils. We use aggregate panel data on 39 countries published by the OECD to model this association. Our results suggest that recruiting higher ability individuals into teaching and permitting scope for quicker salary advancement will have a positive effect on pupil outcomes.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-01-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132678128","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 : 2011-01-01DOI: 10.1111/j.1468-0327.2010.00258.x
Alberto Bisin, Eleonora Patacchini, T. Verdier, Y. Zenou
We study the relationship between ethnic identity and labor-market outcomes of non-EU immigrants in Europe. Using the European Social Survey, we find that there is a penalty to be paid for immigrants with a strong identity. Being a first generation immigrant leads to a penalty of about 17 percent while second-generation immigrants have a probability of being employed that is not statistically different from that of natives. However, when they have a strong identity, second-generation immigrants have a lower chance of finding a job than natives. Our analysis also reveals that the relationship between ethnic identity and employment prospects may depend on the type of integration and labor-market policies implemented in the country where the immigrant lives. More flexible labor markets help immigrants to access the labor market but do not protect those who have a strong ethnic identity.
{"title":"Ethnic Identity and Labour Market Outcomes of Immigrants in Europe","authors":"Alberto Bisin, Eleonora Patacchini, T. Verdier, Y. Zenou","doi":"10.1111/j.1468-0327.2010.00258.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2010.00258.x","url":null,"abstract":"We study the relationship between ethnic identity and labor-market outcomes of non-EU immigrants in Europe. Using the European Social Survey, we find that there is a penalty to be paid for immigrants with a strong identity. Being a first generation immigrant leads to a penalty of about 17 percent while second-generation immigrants have a probability of being employed that is not statistically different from that of natives. However, when they have a strong identity, second-generation immigrants have a lower chance of finding a job than natives. Our analysis also reveals that the relationship between ethnic identity and employment prospects may depend on the type of integration and labor-market policies implemented in the country where the immigrant lives. More flexible labor markets help immigrants to access the labor market but do not protect those who have a strong ethnic identity.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"87 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116431995","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 : 2010-10-01DOI: 10.1111/j.1468-0327.2010.00251.x
Romain G. Rancière, A. Tornell, A. Vamvakidis
"Currency mismatch is a vehicle that exposes the economy to systemic risk, but it is also an engine of growth. We analyse this dual role at the macro and the micro levels. At the aggregate level, we construct a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers - that is, those with no foreign currency income. Using our measure, we find that across emerging European economies, increases in currency mismatch are associated with higher growth in tranquil times, but also with more severe crises. On net, after taking into account the crisis period, we find a positive link between currency mismatch and growth. These results are also confirmed for a broader sample of emerging economies. In our firm-level analysis, we find that in emerging Europe, currency mismatch relaxes borrowing constraints, reduces interest rates and enhances growth across sets of firms that arguably are the most credit constrained - that is, small firms in non-tradables sectors - but not across large firms. An advantage of our approach is that it considers both listed and non-listed firms, and so we are able to effectively capture the effects of currency mismatch across the entire economy, not just the financially privileged stock market listed firms." Copyright (c) CEPR, CES, MSH, 2010.
{"title":"Currency Mismatch, Systemic Risk and Growth in Emerging Europe","authors":"Romain G. Rancière, A. Tornell, A. Vamvakidis","doi":"10.1111/j.1468-0327.2010.00251.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2010.00251.x","url":null,"abstract":"\"Currency mismatch is a vehicle that exposes the economy to systemic risk, but it is also an engine of growth. We analyse this dual role at the macro and the micro levels. At the aggregate level, we construct a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers - that is, those with no foreign currency income. Using our measure, we find that across emerging European economies, increases in currency mismatch are associated with higher growth in tranquil times, but also with more severe crises. On net, after taking into account the crisis period, we find a positive link between currency mismatch and growth. These results are also confirmed for a broader sample of emerging economies. In our firm-level analysis, we find that in emerging Europe, currency mismatch relaxes borrowing constraints, reduces interest rates and enhances growth across sets of firms that arguably are the most credit constrained - that is, small firms in non-tradables sectors - but not across large firms. An advantage of our approach is that it considers both listed and non-listed firms, and so we are able to effectively capture the effects of currency mismatch across the entire economy, not just the financially privileged stock market listed firms.\" Copyright (c) CEPR, CES, MSH, 2010.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124827554","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 : 2010-10-01DOI: 10.1111/j.1468-0327.2010.00252.x
Rafael Repullo, Jesus Saurina Salas, Carlos Trucharte
Policy discussions on the recent financial crisis feature widespread calls to address the pro-cyclicaleffects of regulation. The main concern is that the new risk-sensitive bank capital regulation (Basel II) may amplify business cycle fluctuations. This paper compares the leading alternative procedures that have been proposed to mitigate this problem. 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 adjusted series with respect to the Hodrick-Prescott trend of the original series. The results show that the best procedures are either to smooth the input 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.
{"title":"Mitigating the Pro-Cyclicality of Basel II","authors":"Rafael Repullo, Jesus Saurina Salas, Carlos Trucharte","doi":"10.1111/j.1468-0327.2010.00252.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2010.00252.x","url":null,"abstract":"Policy discussions on the recent financial crisis feature widespread calls to address the pro-cyclicaleffects of regulation. The main concern is that the new risk-sensitive bank capital regulation (Basel II) may amplify business cycle fluctuations. This paper compares the leading alternative procedures that have been proposed to mitigate this problem. 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 adjusted series with respect to the Hodrick-Prescott trend of the original series. The results show that the best procedures are either to smooth the input 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.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"7 5","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133205432","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 : 2010-07-01DOI: 10.1111/j.1468-0327.2010.00248.x
L. Bettendorf, M. Devereux, A. van der Horst, Ruud A. De Mooij
This paper explores the economic consequences of proposed EU reforms for a common consolidated corporate tax base. The reforms replace separate accounting with formula apportionment as a way to allocate corporate tax bases across countries. To assess the economic implications, we use a numerical computable general equilibrium (CGE) model for Europe. It encompasses several decision margins of firms such as marginal investment, FDI decisions, and multinational profit shifting. The simulations suggest that consolidation does not yield substantial welfare gains for Europe. The variation of effects across countries is large and depends on the choice of the apportionment formula. Consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonization, in addition to base harmonization.
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Pub Date : 2010-07-01DOI: 10.1111/j.1468-0327.2010.00249.x
Katrin Assenmacher, S. Gerlach
"Following the financial crisis, many have argued that monetary policy should lean against asset price increases and that deviations of credit and asset prices from trend can be used to capture financial imbalances. We study quarterly data spanning 1986-2008 for a sample of 18 countries and argue that such measures contain little information useful for forecasting the future economic conditions. This casts doubts on the leaning-against-the-wind view. We also argue that tightening monetary policy in response to such imbalances are likely to depress real growth substantially. That finding, however, is sensitive to the Lucas critique." Copyright (c) CEPR, CES, MSH, 2010.
{"title":"Monetary Policy and Financial Imbalances: Facts and Fiction","authors":"Katrin Assenmacher, S. Gerlach","doi":"10.1111/j.1468-0327.2010.00249.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2010.00249.x","url":null,"abstract":"\"Following the financial crisis, many have argued that monetary policy should lean against asset price increases and that deviations of credit and asset prices from trend can be used to capture financial imbalances. We study quarterly data spanning 1986-2008 for a sample of 18 countries and argue that such measures contain little information useful for forecasting the future economic conditions. This casts doubts on the leaning-against-the-wind view. We also argue that tightening monetary policy in response to such imbalances are likely to depress real growth substantially. That finding, however, is sensitive to the Lucas critique.\" Copyright (c) CEPR, CES, MSH, 2010.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"88 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125515808","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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