capital management in mutual financial institutions abstract capital management by mutual financial institutions such as credit unions provides a valuable testing ground for assessing the impact of capital regulation and theories of managerial behaviour in financial institutions limited access to external equity capital means that capital accumulation must be met primarily by reliance on retained earnings to deal with shocks to the capital position and avoid breaching regulatory requirements managers will aim to have a buffer of capital in excess of the regulatory minimum moreover mutual governance arrangements and an absence of capital market discipline mean that managers have discretion to set target capital ratios which differ significantly from industry averages this paper develops a formal model of capital management and risk management in mutual financial institutions such as credit unions which reflects these industry characteristics the model is tested using data from larger credit unions in australia which have been subject to the basel accord risk weighted capital requirements since 1993 the data supports the hypothesis that credit unions manage their capital position by setting a short term target profit rate return on assets which is positively related to asset growth and which is aimed at gradually removing discrepancies between the actual and desired capital ratio desired capital ratios vary significantly across credit unions there is little evidence of short run adjustments to the risk of the asset portfolio to achieve a desired capital position

are household portfolios efficient an analysis conditional on housing in this paper we argue that standard tests of portfolio efficiency are biased towards rejection because they neglect the existence of illiquid wealth in the case of household portfolios the most important illiquid asset is housing if housing stock adjustments are costly and therefore infrequent we show how the dynamic optimization problem produces optimal portfolios in periods of no adjustment that are affected by housing price risk through a hedge term when the housing stock is not adjusted we argue that tests for portfolio efficiency of financial asset must then be run conditionally upon housing wealth in our application we use italian household portfolio data from shiw 1998 and time series data on financial asset and housing stock returns to assess whether actual portfolios are efficient we first consider purely financial portfolios and portfolios that also treat the housing stock as another asset we then consider the consequences of treating the housing stock as given and test for efficiency in this framework our empirical results support the view that the presence of illiquid wealth can explain portfolio choice by home owners

capital requirements and bank behaviour empirical evidence for switzerland abstract in recent years regulators have increased their focus on the capital adequacy of banking institutions to enhance the stability of the financial system the purpose of the present paper is to shed some light on whether and how swiss banks react to constraints placed by the regulator on their capital building on previous work by shrieves and dahl cf shrieves r e dahl d 1992 the relationship between risk and capital in commercial banks journal of banking and finance 16 439 457 we use a simultaneous equations model to analyse adjustments in capital and risk at swiss banks when those approach the minimum regulatory capital level our results indicate that regulatory pressure induce banks to increase their capital but does not affect the level of risk

detecting abnormal credit union performance abstract credit unions are an important financial intermediary but little credit union research is done a primary reason for the lack of research is the cooperative nature of the industry making traditional methods of detecting abnormal performance inappropriate this paper proposes two methods of detecting abnormal performance one parametric the other non parametric instead of testing the efficiency of the institution this paper proposes testing the return vector as indicated in the theoretical objective function of the member simulations demonstrate that both methods are correctly specified and powerful

credit union rate and earnings retention decisions under uncertainty and taxation this paper presents a model of credit union loan and deposit rate setting when net income flows are uncertain and subj ect to taxation optimal rates are chosen to maximize the expected va lue of a performance measure based on a comparison of the credit unio n s rates to alternative rates subject to a probabilistic constraint on the net change in capital reserves relative to a capital adequacy standard taxation will alter the end of period trade off between th e change in capital reserves and the immediate distribution of surplu s and would likely affect credit unions in a nonuniform manner and p erhaps be regressive in nature copyright 1988 by ohio state university press

bid rigging and the threat of government prosecution in this article i develop a simple bidding model in which collusion is endogenous buyers at a first price sealed bid auction decide whether to rig their bids given that they face the threat of government prosecution a legal authority chooses whether to investigate the buyers on the basis of the bids tendered in the unique sequential equilibrium of the game buyers rig their bids with positive probability but the legal authority can never ascertain on the basis of the bids alone that a conspiracy has formed

capital accumulation and deposit pricing in mutual financial institutions this paper presents a multiperiod model of a deposit type mutual financial institution and analyzes the manager s capital accumulation and deposit pricing decisions under uncertainty the model is meant to describe a mutual savings and loan assoeiation sla or a credit union in which there are no stockholders

how bank capital buffers vary across countries the influence of cost of deposits market power and bank regulation abstract this paper analyzes the bank and country determinants of capital buffers using a panel data of 1337 banks in 70 countries between 1992 and 2002 after controlling for adjustment costs and the endogeneity of explanatory variables the results show that capital buffers are positively related to the cost of deposits and bank market power although the relations vary across countries depending on regulation supervision and institutions their impact is the result of two generally opposing effects restrictions on bank activities and official supervision reduce the incentives to hold capital buffers by weakening market discipline but at the same time they promote higher capital buffers by increasing market power institutional quality has the two opposite effects better accounting disclosure and less generous deposit insurance however have a clear positive effect on capital buffers by both strengthening market discipline and making charter value better able to reduce risk taking incentives

modeling the birth and death of cartels with an application to evaluating competition policy one of the primary challenges to measuring the impact of antitrust policy on collusion is that the cartel population is unobservable we observe only the population of discovered cartels to address this challenge a model of cartel creation and dissolution is developed to endogenously derive the populations of cartels and discovered cartels it is then shown how one can infer the impact of antitrust policy on the population of cartels by measuring its impact on the population of discovered cartels in particular the change in the distribution on the duration of discovered cartels could be informative in assessing whether a new antitrust policy is reducing the latent rate of cartels

cartel pricing dynamics with reference dependent preferences this paper characterizes cartel pricing dynamics when consumers have reference dependent preferences firms have a common discount factor unknown to consumers and a common cost i i d over time consumers observe prices over time and update their expectations about firms ability to collude which affects consumers price expectations reference dependent preferences make consumers lose utility when the actual price is higher than the expected one which forces colluding firms to raise prices alongside consumers price expectations this increasing price path is capped by the price arising when consumers are sure that firms collude

optimal cartel pricing in the presence of an antitrust authority the dynamic behavior of a price fixing cartel is explored when it is concerned about creating suspicions that a cartel has formed consistent with preceding static theories the cartel s steady state price is decreasing in the damage multiple and the probability of detection however contrary to those theories it is independent of the level of fixed fines it is also shown that the cartel prices higher when a more competitive benchmark price is used in calculating damages

optimal antitrust policy under different regimes of fines abstract this paper shows how antitrust laws against price fixing can be enforced efficiently in the presence of asymmetric information between the authorities and the industry and under different regimes of pecuniary punishment we consider two regimes of fines that are often used in practice the first involves a fine based on revenues of the industry while the second is related to the damage caused to consumers the analysis shows that since investigation is costly it is optimal from a welfare point of view to tolerate some degree of collusion in both cases comparing the deterrence levels we show that no regime is a priori better than the other in addition we show that for industries where the possibilities of collusion are small the first system dominates the second in terms of efficiency conversely for high possibilities of collusion the second system is better

the diversification and financial performance of us credit unions abstract for us credit unions revenue from non interest sources has increased significantly in recent years we investigate the impact of revenue diversification on financial performance for the period 1993 2004 the impact of a change in strategy that alters the share of non interest income is decomposed into a direct exposure effect reflecting the difference between interest and non interest bearing activities and an indirect exposure effect which reflects the effect of the institution s own degree of diversification on both risk adjusted and unadjusted returns measures a positive direct exposure effect is outweighed by a negative indirect exposure effect for all but the largest credit unions this may imply that similar diversification strategies are not appropriate for large and small credit unions small credit unions should eschew diversification and continue to operate as simple savings and loan institutions while large credit unions should be encouraged to exploit new product opportunities around their core expertise

favor exchange in collusion empirical study of repeated procurement auctions in japan abstract it is known that bid rigging in public work auctions in japan often takes the form of exchanging favors in such a scheme the winner is designated based on favors he has given to other ring members by explicitly modeling favor as an explanatory variable this paper analyzes data from the public works auctions for consulting works in naha japan to confirm that such a collusion scheme is in operation

some implications of antitrust laws for cartel pricing abstract price dynamics are characterized for a price fixing cartel antitrust laws reduce cartel prices even though cartel detection occurs with probability zero in response to cheating the non collusive price gradually moves from the collusive price to the static nash equilibrium price

the deterrent effect of antitrust enforcement in this paper we formulate and test a model of collusive pricing in the presence of antitrust enforcement we show that a cartel s optimal price is likely to be neither the competitive price nor the price that the cartel would set in the absence of antitrust enforcement but rather an intermediate price that depends on the levels of antitrust enforcement efforts and penalties our empirical results reveal that increasing antitrust enforcement in the presence of a credible threat of large damage awards has the deterrent effect of reducing mark ups in the bread industry

collusion under monitoring of sales collusion under imperfect monitoring is explored when firms prices are private information and their quantities are public information such an information structure is consistent with several recent price fixing cartels such as those in lysine and vitamins for a class of symmetric oligopoly games it is shown that symmetric equilibrium punishments cannot sustain any collusion an asymmetric punishment is characterized that does sustain collusion and it has firms whose sales exceed their quotas compensating those firms with sales below their quotas in practice cartels could have performed such transfers through sales among the cartel members

antitrust enforcement under asymmetric information optimal antitrust policy toward collusion to fix prices is examined in an asymmetric information setting the antitrust authority does not know cartel costs and so cannot distinguish between a high cost competitive industry and a low cost cartel the problem differs from principal agent models since firms can choose competitive or collusive behavior with costly enforcement the authority is shown to commit itself to a schedule of probabilities of bringing suit that depends on the observed market price collusive firms moderate markups to reduce the risk of being prosecuted copyright 1989 by royal economic society

the cyclical behaviour of european bank capital buffers using an unbalanced panel of accounting data from 1997 to 2004 and controlling for individual bank costs and risk we find capital buffers of the banks in the eu15 have a significant negative co movement with the cycle for banks in the accession countries there is significant positive co movement capital buffers of commercial and savings banks and of large banks exhibit negative co movement those of co operative and smaller banks exhibit positive co movement speeds of adjustment are fairly slow we interpret these results and discuss policy implications noting that negative co movement of capital buffers will exacerbate the pro cyclical impact of basel ii

potential performance and tests of portfolio efficiency abstract the potential performance of an asset set may be obtained by choosing the portfolio proportions to maximize the sharpe 1966 performance measure if a portfolio has a sharpe measure equivalent to the potential performance of the underlying set of assets then it is efficient multivariate statistical procedures for comparing potential performance and testing portfolio efficiency are developed and then evaluated using simulations two likelihood ratio statistics are then used to compare stock and bond indices against sets of 20 and 40 portfolios the procedures are also compared to the gibbons 1982 methodology for testing financial models

determination of optimal penalties for antitrust violations in a dynamic setting we analyze a differential game describing the interactions between a firm that might be violating competition law and the antitrust authority the objective of the authority is to minimize social costs loss in consumer surplus induced by an increase in prices above marginal costs it turns out that the penalty schemes which are used now in eu and us legislation appear not to be as efficient as desired from the point of view of minimization of consumer loss from price fixing activities of the firm in particular we prove that full compliance behavior is not sustainable as a nash equilibrium in markovian strategies over the whole planning period and moreover that it will never arise as the long run steady state equilibrium of the model we also investigate the question which penalty system enables us to completely deter cartel formation in a dynamic setting we found that this socially desirable outcome can be achieved in case the penalty is an increasing function of the degree of offence and is negatively related to the probability of law enforcement

are treble damages neutral sequential equilibrium and private antitrust enforcement a sequential equilibrium model of private antitrust enforcement is presented consumers have incomplete information about cartel costs and cannot accurately estimate a priori the damage recovery from an antitrust action consumers are able to infer cartel costs from the equilibrium pricing strategy of firms the universal divinity criterion is used to characterize the sequential equilibrium it is shown that for a sufficiently large damage multiple antitrust enforcement effectively increases social welfare copyright 1990 by american economic association

post cartel pricing during litigation standard methods in the u s for calculating antitrust damages in price fixing cases are shown to create a strategic incentive for firms to price above the non collusive price after the cartel has been dissolved this results in an overestimate of the but for price and an underestimate of the level of damages the extent of this upward bias in the but for price is greater the longer the cartel was in place and the more concentrated the industry

the impact of collusion on price behavior empirical results from two recent cases abstract we use extended arch and garch models to examine the differences in the behavior of the first two moments of the price distribution during collusive and competitive phases of two recently discovered conspiracies citric acid and lysine according to our results the conspirators managed to raise prices by 9 and 25 cents per pound in the short run relative to non collusive periods also the variance of prices during the lysine conspiracy was lower and the variance of prices during the citric acid conspiracy was higher than during more competitive periods the proposed methodology may be used for antitrust screening and prosecution purposes

cartel pricing dynamics with cost variability and endogenous buyer detection this paper characterizes collusive pricing patterns when buyers may detect the presence of a cartel buyers are assumed to become suspicious when observed prices are anomalous we find that the cartel price path is comprised of two phases during the transitional phase price is generally rising and relatively unresponsive to cost shocks during the stationary phase price responds to cost but is much less sensitive than under non collusion or simple monopoly the length of the transition phase is decreasing in the variance of cost shocks it is also shown that the cartel price path may overshoot its long run level so that price converges from above

cartel pricing dynamics in the presence of an antitrust authority cartel pricing is characterized when firms are concerned about creating suspicions that a cartel has formed balancing concerns about maintaining the stability of the cartel with those of avoiding detection the cartel may either i gradually raise price to its steady state level or ii gradually raise price and then have it decline to its steady state level antitrust laws may have a perverse effect as they make cartel stability easier and thus allow for higher cartel prices

tacit collusion with imperfect monitoring in the canadian manufacturing industry an empirical study this article undertakes a cross sectoral analysis of a salient empirical implication of the model of tacit collusion advanced by abreu pearce and stachetti 1986 specifically we assess the prevalence of a first order markovian process for alternating between price wars and collusive periods through nonparametric tests the analysis focuses on 30 different industries in canada the evidence provides weak support for optimal collusion in one industry which is consistent with the idea that such kind of collusive arrangements is unusual or if collusion is all too common that price wars as deviations from collusion are rare

capital and risk in property liability insurance markets abstract this paper investigates the capital and portfolio risk decisions of property liability insurance firms a theoretical model based on option pricing theory is developed which predicts a positive relationship between insurer capital and risk as firms balance these two factors to achieve their desired overall insolvency risk the implications of the model are then tested empirically using a simultaneous equations methodology the results support the predictions of the model they also provide evidence that managerial incentives play a role in determining capital and risk in insurance markets the findings have significant implications for insurance solvency regulation

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

price fixing policy abstract the prohibition against price fixing is competition law s most important and least controversial provision yet there is far less consensus than meets the eye on what constitutes price fixing and prevalent understandings cannot be reconciled with principles of oligopoly theory this article 1 presents a fundamental reconceptualization of our understanding of horizontal agreements 2 develops a systematic analysis of price fixing policy that focuses on its deterrence benefits and chilling costs and 3 compares this direct approach to commentators favored formulations that typically involve some sort of formalistic communications based prohibition by targeting a subset of means rather than the illicit ends conventional formulations tend to impose liability in cases with lower deterrence benefits and greater chilling costs than those reached under a direct approach and to incur greater administrative costs as well

efficiency risk aversion and portfolio insurance an analysis of financial asset portfolios held by investors in the united kingdom using data for the united kingdom the author shows that investors in six different wealth ranges hold mean variance efficient portfolios of financial assets this result permits him to estimate coefficients of relative risk aversion for investors in each wealth range the author finds that these coefficients are much higher than most previous studies have found this implies that investors 1 are unwilling to hold risky assets unless they are compensated with a sufficiently high risk premium and 2 are willing to pay for portfolio insurance the general nonavailability of portfolio insurance in the united kingdom appears to indicate a supply side rather than a demand side failure copyright 1996 by royal economic society

bank concentration and financial constraints on firm level investment in europe abstract this study examines the effect of bank concentration on financing constraints of non financial firms in 14 european countries between 1992 and 2005 using firm level data we analyze financial constraints with the euler equation derived from the dynamic investment model we find that with a highly concentrated banking sector firms are less financially constrained this result is robust to consideration of firm opacity firm size and business cycle relaxation of financial constraint while greater for firms in less opaque industries also accrues for firms in more opaque industries greater bank concentration is associated with less tight financial constraint during both expansions and recessions results overall are consistent with an information based hypothesis that more market power increases banks incentives to produce information on potential borrowers findings are robust to consideration of country specific institutional factors

optimal corporate leniency programs this study characterizes the corporate leniency policy that minimizes the frequency with which collusion occurs though it can be optimal to provide only partial leniency plausible sufficient conditions are provided whereby the antitrust authority should waive all penalties for the first firm to come forward it is also shown that restrictions should be placed on when amnesty is awarded though it can be optimal to award amnesty even when the antitrust authority is very likely to win the case without insider testimony