This paper examines the relation between tournament incentives and reserve management. We find a positive relation between internal tournament incentives and reserve errors, implying that a larger pay gap as a tournament prize induces vice presidents (VPs) to overestimate loss reserves. In other words, a higher tournament prize is associated with conservative loss reserve management. Unlike the literature, we do not find a positive relation between tournament incentive and profits (risk taking behavior). Taken together, the evidence indicates that VPs focus on strong financial health of the firm instead of its profitability. In addition, we find the impact of internal tournament incentives on the reserve error is more pronounced for larger, financially weak and more geographically focused firms, and is mitigated for the firms with higher percentage of claim loss reserve over total liability and paying relatively higher tax rates. Our results also suggest that SOX mitigates the conservative reserve behavior. Finally, we also find that as board independence enhances, VPs induced by promotion-based tournaments become more likely to have conservative reserve behavior.
{"title":"Tournament Incentives and Reserve Management","authors":"A. Nart, Gene C. Lai, Chia-Ling Ho","doi":"10.2139/ssrn.3504998","DOIUrl":"https://doi.org/10.2139/ssrn.3504998","url":null,"abstract":"This paper examines the relation between tournament incentives and reserve management. We find a positive relation between internal tournament incentives and reserve errors, implying that a larger pay gap as a tournament prize induces vice presidents (VPs) to overestimate loss reserves. In other words, a higher tournament prize is associated with conservative loss reserve management. Unlike the literature, we do not find a positive relation between tournament incentive and profits (risk taking behavior). Taken together, the evidence indicates that VPs focus on strong financial health of the firm instead of its profitability. In addition, we find the impact of internal tournament incentives on the reserve error is more pronounced for larger, financially weak and more geographically focused firms, and is mitigated for the firms with higher percentage of claim loss reserve over total liability and paying relatively higher tax rates. Our results also suggest that SOX mitigates the conservative reserve behavior. Finally, we also find that as board independence enhances, VPs induced by promotion-based tournaments become more likely to have conservative reserve behavior.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127871885","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 paper examines the differential impact of an unexpected regulatory banking sector shock on the portfolio companies of the private equity arms of affected and unaffected banks. Robust to a battery of checks, we find that portfolio companies of the private equity subsidiaries of banks affected by the 2011 EBA Capital Exercise suffer significantly weaker investment and financing at the onset of the shock, and subsequently poorer performance, relative to portfolio companies of unaffected banks. The results are amplified where the portfolio company is more likely to be financially constrained and where the private equity investor is less experienced. Our findings confirm recent literature's concerns over the approach to the capital regulation of banks and its impact on the real economy.
{"title":"Bank-Affiliated Private Equity and Shocks to the Banking Sector","authors":"P. Lavery","doi":"10.2139/ssrn.3564056","DOIUrl":"https://doi.org/10.2139/ssrn.3564056","url":null,"abstract":"This paper examines the differential impact of an unexpected regulatory banking sector shock on the portfolio companies of the private equity arms of affected and unaffected banks. Robust to a battery of checks, we find that portfolio companies of the private equity subsidiaries of banks affected by the 2011 EBA Capital Exercise suffer significantly weaker investment and financing at the onset of the shock, and subsequently poorer performance, relative to portfolio companies of unaffected banks. The results are amplified where the portfolio company is more likely to be financially constrained and where the private equity investor is less experienced. Our findings confirm recent literature's concerns over the approach to the capital regulation of banks and its impact on the real economy.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126515165","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}
With the economic downturn resulting from downgrading of ratings of sub-prime backed securities and collapse of some banking organizations in the world, the Bank of International Settlements (BIS) started to strengthen the capital requirements for banks to prevent banks from collapsing by taking excessive risks. Accordingly, BIS revised the guidelines of Basel I and II as Basel III introducing enhanced regulatory requirements to improve resilience of banks. Accordingly, through Basel III, the quantity and quality of capital was raised, consistency and transparency of capital and the risk coverage of capital framework was improved. As supplementary measures to the risk framework, the leverage ratio was introduced, the procyclicality was reduced and countercyclical buffers were promoted and Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were introduced as short term and long term liquidity measures, respectively. With the above requirements, Central Bank of Sri Lanka (CBSL) announced the road map for implementation of Basel III in Sri Lanka in 2014. Accordingly, LCR implemented with effect from 1 April 2015, minimum capital requirements of banks were increased from end 2015 gradually to achieve the target level, implemented Leverage Ratio with effect from 1 January 2019, NSFR and capital requirements with effect from 1 January 2019 including capital conservation buffers to fully implementation of Basel III in Sri Lankan banking sector.
{"title":"Latest Developments of Basel III in Sri Lanka","authors":"C. Gunawardhana, Manel Damayanthi","doi":"10.2139/ssrn.3473616","DOIUrl":"https://doi.org/10.2139/ssrn.3473616","url":null,"abstract":"With the economic downturn resulting from downgrading of ratings of sub-prime backed securities and collapse of some banking organizations in the world, the Bank of International Settlements (BIS) started to strengthen the capital requirements for banks to prevent banks from collapsing by taking excessive risks. Accordingly, BIS revised the guidelines of Basel I and II as Basel III introducing enhanced regulatory requirements to improve resilience of banks. Accordingly, through Basel III, the quantity and quality of capital was raised, consistency and transparency of capital and the risk coverage of capital framework was improved. As supplementary measures to the risk framework, the leverage ratio was introduced, the procyclicality was reduced and countercyclical buffers were promoted and Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were introduced as short term and long term liquidity measures, respectively. With the above requirements, Central Bank of Sri Lanka (CBSL) announced the road map for implementation of Basel III in Sri Lanka in 2014. Accordingly, LCR implemented with effect from 1 April 2015, minimum capital requirements of banks were increased from end 2015 gradually to achieve the target level, implemented Leverage Ratio with effect from 1 January 2019, NSFR and capital requirements with effect from 1 January 2019 including capital conservation buffers to fully implementation of Basel III in Sri Lankan banking sector.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122472049","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}
Corporations and other forms of business organizations can be supplemented with blockchain-based agency constructs. Blockchain-based decentralized autonomous organizations (DAOs) expand the definition of the firm. On-chain DAO governance enables dynamic regulatory features that facilitate unprecedented decentralized regulatory solutions.
{"title":"Blockchain-Based Corporate Governance","authors":"Wulf A. Kaal","doi":"10.2139/ssrn.3441904","DOIUrl":"https://doi.org/10.2139/ssrn.3441904","url":null,"abstract":"Corporations and other forms of business organizations can be supplemented with blockchain-based agency constructs. Blockchain-based decentralized autonomous organizations (DAOs) expand the definition of the firm. On-chain DAO governance enables dynamic regulatory features that facilitate unprecedented decentralized regulatory solutions.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116943351","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 examine the alternative reference rates that are set to replace the London Interbank Offered Rate (LIBOR) as benchmark rate by the end of 2021. After providing the relevant background, we show that: (i) depending on the marginal lenders, tighter regulatory constraints can either increase or decrease the alternative benchmarks; (ii) increases in the amount of government debt outstanding increase the alternative benchmarks, more so for collateralized rates; (iii) more central bank reserves lower the alternative benchmarks. In addition, we show that term rates based on the alternative reference rates can be detached from banks' marginal funding costs.
{"title":"Life After LIBOR","authors":"Sven Klingler, O. Syrstad","doi":"10.2139/ssrn.3390856","DOIUrl":"https://doi.org/10.2139/ssrn.3390856","url":null,"abstract":"We examine the alternative reference rates that are set to replace the London Interbank Offered Rate (LIBOR) as benchmark rate by the end of 2021. After providing the relevant background, we show that: (i) depending on the marginal lenders, tighter regulatory constraints can either increase or decrease the alternative benchmarks; (ii) increases in the amount of government debt outstanding increase the alternative benchmarks, more so for collateralized rates; (iii) more central bank reserves lower the alternative benchmarks. In addition, we show that term rates based on the alternative reference rates can be detached from banks' marginal funding costs.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"77 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124684767","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}
Bank stress tests must be revisable in order to cope with new, emerging risks in the financial sector. Some of these revisions will likely involve model parameters, in addition to the macro-variable shocks that have been applied heretofore. The potential for such revisions would be handicapped by making the test models fully transparent to the public. This tension makes it inadvisable to share model parameters widely if the stress tests are to remain an informative component of the supervisory system for large banks.
{"title":"Transparency and Model Evolution in Stress Testing","authors":"M. Flannery","doi":"10.2139/ssrn.3431679","DOIUrl":"https://doi.org/10.2139/ssrn.3431679","url":null,"abstract":"Bank stress tests must be revisable in order to cope with new, emerging risks in the financial sector. Some of these revisions will likely involve model parameters, in addition to the macro-variable shocks that have been applied heretofore. The potential for such revisions would be handicapped by making the test models fully transparent to the public. This tension makes it inadvisable to share model parameters widely if the stress tests are to remain an informative component of the supervisory system for large banks.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124195755","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 examine impediments to liquidity provision by mutual funds to insurance companies during corporate bond fire sales. We find that financial regulation and limited capital capacity significantly affect liquidity provision. Mutual funds reduced their purchase of fire-sale bonds following regulatory changes after the 2008–2009 financial crisis. Funds facing more capital constraints (proxied by smaller cash and Treasury holdings, less liquid corporate bond investments, higher redemption risk, and less active investment styles) provide less liquidity. Mutual funds actively investing in fire-sale bonds earn significant returns from liquidity provision and demonstrate superior overall skills in corporate bond investments.
{"title":"Fire Sales and Impediments to Liquidity Provision in the Corporate Bond Market","authors":"Z. Wang, Hanjiang Zhang, Xinde Zhang","doi":"10.2139/ssrn.2644098","DOIUrl":"https://doi.org/10.2139/ssrn.2644098","url":null,"abstract":"We examine impediments to liquidity provision by mutual funds to insurance companies during corporate bond fire sales. We find that financial regulation and limited capital capacity significantly affect liquidity provision. Mutual funds reduced their purchase of fire-sale bonds following regulatory changes after the 2008–2009 financial crisis. Funds facing more capital constraints (proxied by smaller cash and Treasury holdings, less liquid corporate bond investments, higher redemption risk, and less active investment styles) provide less liquidity. Mutual funds actively investing in fire-sale bonds earn significant returns from liquidity provision and demonstrate superior overall skills in corporate bond investments.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"78 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126235024","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 present a model of market makers subject to recent banking regulations: liquidity and capital constraints in the style of Basel III and a position limit in the style of the Volcker Rule. Regulation causes market makers to reduce their intermediation by refusing principal positions. However, it can improve the bid-ask spread because it induces new market makers to enter. Since market makers intermediate less, asset prices exhibit a liquidity premium. Costs of regulation can be assessed by measuring principal positions and asset prices but not by measuring bid-ask spreads.
{"title":"Banking Regulation and Market Making","authors":"David Cimon, Corey Garriott","doi":"10.2139/ssrn.2882594","DOIUrl":"https://doi.org/10.2139/ssrn.2882594","url":null,"abstract":"We present a model of market makers subject to recent banking regulations: liquidity and capital constraints in the style of Basel III and a position limit in the style of the Volcker Rule. Regulation causes market makers to reduce their intermediation by refusing principal positions. However, it can improve the bid-ask spread because it induces new market makers to enter. Since market makers intermediate less, asset prices exhibit a liquidity premium. Costs of regulation can be assessed by measuring principal positions and asset prices but not by measuring bid-ask spreads.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114718642","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}
Tin Tironsakkul, Manuel Maarek, Andrea Eross, Mike Just
Since the creation of Bitcoin, transaction tracking is one of the prominent means for following the movement of Bitcoins involved in illegal activities. Although every Bitcoin transaction is recorded in the blockchain ledger, which is transparent for anyone to observe and analyse, Bitcoin's pseudonymity system and transaction obscuring techniques still allow criminals to disguise their transaction trail. While there have been a few attempts to develop tracking methods, there is no accepted evaluation method to measure their accuracy. Therefore, this paper introduces a metrics-based evaluation framework to investigate the performance indicators of a theft transaction tracking. We use this framework to investigate strategies for transaction tracking. This paper also introduces two new tainting methods and an address profiling approach. We run an experiment to compare the accuracy of tainting strategies using data from real Bitcoin theft and a set of controls.
{"title":"Probing the Mystery of Cryptocurrency Theft: An Investigation into Methods for Taint Analysis","authors":"Tin Tironsakkul, Manuel Maarek, Andrea Eross, Mike Just","doi":"10.2139/ssrn.3403656","DOIUrl":"https://doi.org/10.2139/ssrn.3403656","url":null,"abstract":"Since the creation of Bitcoin, transaction tracking is one of the prominent means for following the movement of Bitcoins involved in illegal activities. Although every Bitcoin transaction is recorded in the blockchain ledger, which is transparent for anyone to observe and analyse, Bitcoin's pseudonymity system and transaction obscuring techniques still allow criminals to disguise their transaction trail. While there have been a few attempts to develop tracking methods, there is no accepted evaluation method to measure their accuracy. Therefore, this paper introduces a metrics-based evaluation framework to investigate the performance indicators of a theft transaction tracking. We use this framework to investigate strategies for transaction tracking. This paper also introduces two new tainting methods and an address profiling approach. We run an experiment to compare the accuracy of tainting strategies using data from real Bitcoin theft and a set of controls.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114569365","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 : 2019-06-01DOI: 10.5089/9781498315227.001
C. Ferreira, N. Jenkinson, Christopher J. Wilson
Developing economies can strengthen their financial systems by implementing the main elements of global regulatory reform. But to build an effective prudential framework, they may need to adapt international standards taking into account the sophistication and size of their financial institutions, the relevance of different financial operations in their market, the granularity of information available and the capacity of their supervisors. Under a proportionate application of the Basel standards, smaller institutions with less complex business models would be subject to a simpler regulatory framework that enhances the resilience of the financial sector without generating disproportionate compliance costs. This paper provides guidance on how non-Basel Committee member countries could incorporate banks’ capital and liquidity standards into their framework. It builds on the experience gained by the authors in the course of their work in providing technical assistance on—and assessing compliance with—international standards in banking supervision.
{"title":"From Basel I to Basel III: Sequencing Implementation in Developing Economies","authors":"C. Ferreira, N. Jenkinson, Christopher J. Wilson","doi":"10.5089/9781498315227.001","DOIUrl":"https://doi.org/10.5089/9781498315227.001","url":null,"abstract":"Developing economies can strengthen their financial systems by implementing the main elements of global regulatory reform. But to build an effective prudential framework, they may need to adapt international standards taking into account the sophistication and size of their financial institutions, the relevance of different financial operations in their market, the granularity of information available and the capacity of their supervisors. Under a proportionate application of the Basel standards, smaller institutions with less complex business models would be subject to a simpler regulatory framework that enhances the resilience of the financial sector without generating disproportionate compliance costs. This paper provides guidance on how non-Basel Committee member countries could incorporate banks’ capital and liquidity standards into their framework. It builds on the experience gained by the authors in the course of their work in providing technical assistance on—and assessing compliance with—international standards in banking supervision.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128967645","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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