Abstract While there is a growing debate among researchers and practitioners on the possible role of central banks and financial regulators in supporting a smooth transition to a low-carbon economy, the information on which macroprudential instruments could be used for reaching the “green structural change” is still quite limited. Moreover, the achievement of climate goals is still affected by the so-called “green finance gap”. This paper addresses these issues by proposing a critical review of existing and novel prudential approaches to incentivizing the decarbonization of banks' balance sheets and aligning finance with sustainable growth and development objectives. The analysis carried out in the paper allows understanding of under which conditions macroprudential policy could tackle climate change and promote green lending, while also containing climate-related financial risks.
{"title":"Fostering Green Investments and Tackling Climate-Related Financial Risks: Which Role for Macroprudential Policies?","authors":"Paola D’Orazio, Lilit Popoyan","doi":"10.2139/ssrn.3106350","DOIUrl":"https://doi.org/10.2139/ssrn.3106350","url":null,"abstract":"Abstract While there is a growing debate among researchers and practitioners on the possible role of central banks and financial regulators in supporting a smooth transition to a low-carbon economy, the information on which macroprudential instruments could be used for reaching the “green structural change” is still quite limited. Moreover, the achievement of climate goals is still affected by the so-called “green finance gap”. This paper addresses these issues by proposing a critical review of existing and novel prudential approaches to incentivizing the decarbonization of banks' balance sheets and aligning finance with sustainable growth and development objectives. The analysis carried out in the paper allows understanding of under which conditions macroprudential policy could tackle climate change and promote green lending, while also containing climate-related financial risks.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134491812","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}
Liquidity creation is a core function of banks and an important economic service to the economy. This chapter discusses two distinct notions of bank liquidity creation developed in the theoretical literature—funding liquidity creation and improved risk sharing for risk-averse depositors. It also examines the empirical literature on bank liquidity creation. The focus is on the economics of bank liquidity creation, both in the traditional relationship banking context and in the shadow-banking context. This chapter discusses related prudential regulation issues, pertaining mainly to capital requirements and liquidity requirements, as well. It provides a historical overview, starting in the early 1800s and ending with Basel III and the Dodd–Frank Act. It identifies open research questions regarding both capital requirements and liquidity requirements.
{"title":"Creation and Regulation of Bank Liquidity","authors":"Christa H. S. Bouwman","doi":"10.2139/ssrn.3266406","DOIUrl":"https://doi.org/10.2139/ssrn.3266406","url":null,"abstract":"Liquidity creation is a core function of banks and an important economic service to the economy. This chapter discusses two distinct notions of bank liquidity creation developed in the theoretical literature—funding liquidity creation and improved risk sharing for risk-averse depositors. It also examines the empirical literature on bank liquidity creation. The focus is on the economics of bank liquidity creation, both in the traditional relationship banking context and in the shadow-banking context. This chapter discusses related prudential regulation issues, pertaining mainly to capital requirements and liquidity requirements, as well. It provides a historical overview, starting in the early 1800s and ending with Basel III and the Dodd–Frank Act. It identifies open research questions regarding both capital requirements and liquidity requirements.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124113599","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 uses enforcement actions issued by US bank regulators to show that banks headquartered in counties with higher levels of social capital (as captured by civic norms and social networks) are less likely to be involved in misconduct. This result is mostly significant for less geographically dispersed banks. The results also show that, following misconduct revelation, sanctioned banks experience greater reductions in deposit growth in counties with higher social capital levels, mostly during the last financial crisis and its aftermath. Taken together, these findings indicate that social capital acts as an external monitoring mechanism that prevents and punishes bank misconduct.
{"title":"Social Capital and Bank Misconduct","authors":"José M. Martín-Flores","doi":"10.2139/ssrn.3249049","DOIUrl":"https://doi.org/10.2139/ssrn.3249049","url":null,"abstract":"This study uses enforcement actions issued by US bank regulators to show that banks headquartered in counties with higher levels of social capital (as captured by civic norms and social networks) are less likely to be involved in misconduct. This result is mostly significant for less geographically dispersed banks. The results also show that, following misconduct revelation, sanctioned banks experience greater reductions in deposit growth in counties with higher social capital levels, mostly during the last financial crisis and its aftermath. Taken together, these findings indicate that social capital acts as an external monitoring mechanism that prevents and punishes bank misconduct.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"146 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133137676","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}
A decade after the financial crisis, regulators worry that the regulation enacted to help stabilize the financial system may be insufficient to prevent another crisis. Examining that regulation with the benefit of hindsight, this Article finds that much has been accomplished but much remains to be done. Most of the existing regulation is ad hoc, providing “tools” rather than a coherent framework. It also is unduly entity-based, largely ignoring markets and other critical elements of the financial system. Furthermore, some of that entity-based regulation is punitive and misguided, responding to the human intuition to assign blame for harm. Financial stability requires a more systematic regulatory framework. The Article builds that framework on normative foundations, recognizing that the fundamental reason to regulate finance should be to correct market failures. Regulation intended to stabilize the financial system should focus on correcting market failures that could trigger and transmit systemic risk—the risk that financial instability will significantly impair the real economy. The Article attempts to identify and better understand those triggers and transmission mechanisms, and their underlying market failures. Finally, it analyzes how regulation could help to correct those market failures, revealing important new insights into regulatory design.
{"title":"Systematic Regulation of Systemic Risk","authors":"S. Schwarcz","doi":"10.2139/SSRN.3233666","DOIUrl":"https://doi.org/10.2139/SSRN.3233666","url":null,"abstract":"A decade after the financial crisis, regulators worry that the regulation enacted to help stabilize the financial system may be insufficient to prevent another crisis. Examining that regulation with the benefit of hindsight, this Article finds that much has been accomplished but much remains to be done. Most of the existing regulation is ad hoc, providing “tools” rather than a coherent framework. It also is unduly entity-based, largely ignoring markets and other critical elements of the financial system. Furthermore, some of that entity-based regulation is punitive and misguided, responding to the human intuition to assign blame for harm. Financial stability requires a more systematic regulatory framework. The Article builds that framework on normative foundations, recognizing that the fundamental reason to regulate finance should be to correct market failures. Regulation intended to stabilize the financial system should focus on correcting market failures that could trigger and transmit systemic risk—the risk that financial instability will significantly impair the real economy. The Article attempts to identify and better understand those triggers and transmission mechanisms, and their underlying market failures. Finally, it analyzes how regulation could help to correct those market failures, revealing important new insights into regulatory design.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124943764","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}
The recent financial crisis has focused attention on identifying and measuring systemic risk. In this paper, we propose a novel approach to estimate the portfolio composition of banks as function of daily interbank trades and stock returns. While banks? assets are reported to regulators and/or the public at relatively low frequencies (e.g. quarterly or annually), our approach estimates bank asset holdings at higher frequencies which allows us to derive precise estimates of (i) portfolio concentration within each bank?a measure of diversification?and (ii) common holdings across banks?a measure of market susceptibility to propagating shocks. We find evidence that systemic risk measures derived from our approach lead, in a forecasting sense, several commonly used systemic risk indicators.
{"title":"Bank Holdings and Systemic Risk","authors":"Celso Brunetti, J. Harris, Shawn Mankad","doi":"10.17016/FEDS.2018.063","DOIUrl":"https://doi.org/10.17016/FEDS.2018.063","url":null,"abstract":"The recent financial crisis has focused attention on identifying and measuring systemic risk. In this paper, we propose a novel approach to estimate the portfolio composition of banks as function of daily interbank trades and stock returns. While banks? assets are reported to regulators and/or the public at relatively low frequencies (e.g. quarterly or annually), our approach estimates bank asset holdings at higher frequencies which allows us to derive precise estimates of (i) portfolio concentration within each bank?a measure of diversification?and (ii) common holdings across banks?a measure of market susceptibility to propagating shocks. We find evidence that systemic risk measures derived from our approach lead, in a forecasting sense, several commonly used systemic risk indicators.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"66 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125439664","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 reports estimates of the marginal benefits and costs of increasing the regulatory minimum bank equity-to-asset “leverage ratio” from 4 to 15 percent. Benefits arise from reducing the probability of a banking crisis. Costs arise from reduced lending, should banks pass off higher equity costs onto borrowers. Net benefits increase with a higher discount rate, a smaller tax advantage of debt, a lower non-financial corporate debt-to-capital ratio, a higher cost of crises, a longer duration of crises or if crises have some permanent effects. Baseline estimates indicate that the benefits equal costs at 19 percent.
{"title":"Benefits and Costs of a Higher Bank Leverage Ratio","authors":"James R. Barth, S. Miller","doi":"10.2139/ssrn.2913734","DOIUrl":"https://doi.org/10.2139/ssrn.2913734","url":null,"abstract":"This study reports estimates of the marginal benefits and costs of increasing the regulatory minimum bank equity-to-asset “leverage ratio” from 4 to 15 percent. Benefits arise from reducing the probability of a banking crisis. Costs arise from reduced lending, should banks pass off higher equity costs onto borrowers. Net benefits increase with a higher discount rate, a smaller tax advantage of debt, a lower non-financial corporate debt-to-capital ratio, a higher cost of crises, a longer duration of crises or if crises have some permanent effects. Baseline estimates indicate that the benefits equal costs at 19 percent.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-07-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124098773","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}
Abstract We evaluate the reliability of credit gap measures estimated over time samples of different lengths. We augment our empirical analysis (which turned out to be somewhat inconclusive) with Monte Carlo experiments. For this purpose we build an agent-based model that realistically reproduces credit cycles and use it to generate the artificial data set. We found that 12–15 years of available data is sufficient for the estimation of reliable credit gaps (i.e. the reliability of credit gap estimates will not improve substantially as more data are added to the sample).
{"title":"When are Credit Gap Estimates Reliable?","authors":"Elena Deryugina, A. Ponomarenko, Anna Rozhkova","doi":"10.2139/ssrn.3210263","DOIUrl":"https://doi.org/10.2139/ssrn.3210263","url":null,"abstract":"Abstract We evaluate the reliability of credit gap measures estimated over time samples of different lengths. We augment our empirical analysis (which turned out to be somewhat inconclusive) with Monte Carlo experiments. For this purpose we build an agent-based model that realistically reproduces credit cycles and use it to generate the artificial data set. We found that 12–15 years of available data is sufficient for the estimation of reliable credit gaps (i.e. the reliability of credit gap estimates will not improve substantially as more data are added to the sample).","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-07-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129018977","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}
The paper discusses the problem of valuation in bank resolution. In an overview over the most relevant principles of valuation theory, the paper notes the difficulties inherent in valuing risks and illiquidity in holding non-traded assets. Subsequently, the paper briefly reviews the resolution of Banco Popular Espanol, and then discusses the need for clarification of the no-investor-worse-off principle, the relation between the price in a sale of business and the presumed outcome in an insolvency procedure, and the difficulties attached to assessing the value of an illiquid asset that is held. The paper concludes with a discussion of the need for time, for valuation and in resolution, warns against a moratorium on withdrawals and payouts, and argues that time pressures would be much reduced if funding in resolution was provided for.
本文讨论了银行清算中的估值问题。在对估值理论最相关原则的概述中，本文指出了对持有非交易资产的风险和非流动性进行估值所固有的困难。随后，本文简要回顾了西班牙人民银行(Banco Popular Espanol)的解决方案，然后讨论了澄清无投资者亏损原则的必要性、企业出售价格与破产程序中假定结果之间的关系，以及评估所持有的非流动性资产价值的困难。论文最后讨论了评估和解决方案的时间需求，警告不要暂停取款和支付，并辩称，如果提供解决方案的资金，时间压力将大大减少。
{"title":"Valuation Reports in the Context of Banking Resolution: What are the Challenges?","authors":"M. Hellwig","doi":"10.2139/ssrn.3209192","DOIUrl":"https://doi.org/10.2139/ssrn.3209192","url":null,"abstract":"The paper discusses the problem of valuation in bank resolution. In an overview over the most relevant principles of valuation theory, the paper notes the difficulties inherent in valuing risks and illiquidity in holding non-traded assets. Subsequently, the paper briefly reviews the resolution of Banco Popular Espanol, and then discusses the need for clarification of the no-investor-worse-off principle, the relation between the price in a sale of business and the presumed outcome in an insolvency procedure, and the difficulties attached to assessing the value of an illiquid asset that is held. The paper concludes with a discussion of the need for time, for valuation and in resolution, warns against a moratorium on withdrawals and payouts, and argues that time pressures would be much reduced if funding in resolution was provided for.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124500826","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}
Reforms of financial regulation after the crisis of 2007-2009 raise the question of what is the relation between financial regulators and competition authorities. Should competition authorities play a role in financial regulation? Should they co-operate with financial regulators? Or should they keep at a distance? The paper gives an overview over some of the issues that are involved in the discussion. Drawing on the experience of the network industries, the first part of the paper discusses the relation between competition authorities and sector-specific regulators more generally. Whereas competition policy involves the application of legal norms involving prohibitions that are formulated in abstract terms, sector-specific regulation involves authorities actually prescribing desired modes of behavior. The ongoing nature of relations makes regulators more prone to capture than competition authorities. In the financial sector, the potential for capture is particularly great because everyone is tempted by the idea that banks should fund their pet projects. Following an overview over the evolution of regulation and competition in the financial industry, the paper discusses various issues that are relevant for competition policy: Technological and regulatory barriers to entry, distortions of competition by explicit or implicit government guarantees, distortions of competition by bailouts making for artificial barriers to exit. Guarantees and bailouts in particular pose special challenges for merger control and for state aid control.
{"title":"Competition Policy and Sector-Specific Regulation in the Financial Sector","authors":"M. Hellwig","doi":"10.2139/ssrn.3212597","DOIUrl":"https://doi.org/10.2139/ssrn.3212597","url":null,"abstract":"Reforms of financial regulation after the crisis of 2007-2009 raise the question of what is the relation between financial regulators and competition authorities. Should competition authorities play a role in financial regulation? Should they co-operate with financial regulators? Or should they keep at a distance? The paper gives an overview over some of the issues that are involved in the discussion. Drawing on the experience of the network industries, the first part of the paper discusses the relation between competition authorities and sector-specific regulators more generally. Whereas competition policy involves the application of legal norms involving prohibitions that are formulated in abstract terms, sector-specific regulation involves authorities actually prescribing desired modes of behavior. The ongoing nature of relations makes regulators more prone to capture than competition authorities. In the financial sector, the potential for capture is particularly great because everyone is tempted by the idea that banks should fund their pet projects. Following an overview over the evolution of regulation and competition in the financial industry, the paper discusses various issues that are relevant for competition policy: Technological and regulatory barriers to entry, distortions of competition by explicit or implicit government guarantees, distortions of competition by bailouts making for artificial barriers to exit. Guarantees and bailouts in particular pose special challenges for merger control and for state aid control.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131144574","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 empirically investigates the influence of bank regulation and supervision on the competitive landscape within banking systems. Using the information on 23 emerging economies from 1996 to 2016, we confirm banking system with lower activity restrictions and (foreign) bank entry barriers to be more competitive. The greater capital stringency and official supervisory power enhances the competition in banking industry. Our findings also highlight that greater explicit guidelines for asset diversification and deposit insurance coverage, and lower private-sector monitoring are associated with more intensive bank competition. A further examination concerning bank crisis reveals that during the bank crisis, the relationship between activity restriction, entry barriers, diversification guidelines and competition become more pronounced, and the positive effect of foreign bank limitation, capital stringency, official supervisory power, and private monitoring on competitive condition become less effective. Finally, we categorize our sample into foreign banks and domestic banks and find that foreign banks are more sensitive to the official supervisory power and private monitoring, and less sensitive to activity restrictions, foreign bank limitations and diversification guidelines.
{"title":"The Impact of Bank Regulation and Supervision on Competition: A Evolution in the Emerging Economies","authors":"Shaofang Li","doi":"10.2139/ssrn.3176498","DOIUrl":"https://doi.org/10.2139/ssrn.3176498","url":null,"abstract":"This article empirically investigates the influence of bank regulation and supervision on the competitive landscape within banking systems. Using the information on 23 emerging economies from 1996 to 2016, we confirm banking system with lower activity restrictions and (foreign) bank entry barriers to be more competitive. The greater capital stringency and official supervisory power enhances the competition in banking industry. Our findings also highlight that greater explicit guidelines for asset diversification and deposit insurance coverage, and lower private-sector monitoring are associated with more intensive bank competition. A further examination concerning bank crisis reveals that during the bank crisis, the relationship between activity restriction, entry barriers, diversification guidelines and competition become more pronounced, and the positive effect of foreign bank limitation, capital stringency, official supervisory power, and private monitoring on competitive condition become less effective. Finally, we categorize our sample into foreign banks and domestic banks and find that foreign banks are more sensitive to the official supervisory power and private monitoring, and less sensitive to activity restrictions, foreign bank limitations and diversification guidelines.","PeriodicalId":376194,"journal":{"name":"ERN: Regulation & Supervision (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-04-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125747089","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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