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

economics in the former soviet union o ne of the most notable but least discussed aspects of the halting attempts during the past six years to reform the economies of the soviet union and now those of its successor states has been the prominent role played by professional economists not since the mid 1920s has the soviet political leadership felt so strongly the need to draw upon the expertise of the economics profession to help determine its course of action the resurgence in the importance of economics has been reflected at the highest political levels of the ussr in the powerful posts held over the past few years by academic economists such as leonid abalkin stanislav shatalin yegor gaidar and many others 2 at lower levels as well economists have been leading voices in the public debate publishing articles in the popular press and helping to shape public opinion this political clout marks a major change in status of economists in the ussr for some 60 years until the initiation of economic reforms under irecent events have rendered much familiar terminology regarding the former ussr anachronistic in addition to historical references we will for convenience continue to use the terms soviet and soviet union to refer to the present day russian federation and any other republics of the former union 2abalkin a member of the soviet now russian academy of sciences and director of the academy s institute of economics was a deputy prime minister under gorbachev shatalin another academician was a member of gorbachev s presidential council and an author of the famous shatalin plan for economic reform gaidar former director of the institute of economic policy was appointed deputy prime minister of the russian federation under boris yeltsin in the fall of 1991

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

bank regulation and risk taking incentives an international comparison of bank risk abstract this paper uses a panel database of 251 banks in 36 countries to analyze the impact of bank regulation on bank charter value and risk taking after controlling for deposit insurance and for the quality of a country s contracting environment the results indicate that regulatory restrictions increase banks risk taking incentives by reducing their charter value banks in countries with stricter regulation have a lower charter value which increases their incentives to follow risky policies these results corroborate a negative relation between regulatory restrictions and the stability of a banking system deposit insurance has a positive influence on bank charter value mitigating the risk shifting incentives it creates this positive influence disappears when we control for the possible endogeneity of deposit insurance

institutional development and bank stability evidence from transition countries g21 p30 p34 p52 abstract this paper takes advantage of the dynamic nature of institutional reforms in transition economies and explores the causal effects of those reforms on bank risk using a difference in difference approach we show that banks financial stability increases substantially after these countries reform their legal insti tutions liberalize banking and restructure corporate governance we also find that the effects of legal and governance reforms on bank risk may critically depend on the progress of banking reforms a further examination of alternative risk measures reveals that the increases in financial stability among banks mainly come from the reduction of asset risk banks tend to have lower roa volatility and fewer nonper forming loans after reforming the institutional environment finally we split our sample into foreign and domestic banks and find that the enhancement of financial stability is more pronounced for domestic banks

income diversification and risk does ownership matter an empirical examination of indian banks abstract we examine the impact of ownership on income diversification and risk for indian banks over the period 2001 2009 we investigate both the determinants of non interest income and the impact of diversification on various profitability and insolvency risk measures for public sector private domestic and foreign banks we document that ownership does matter in the pursuit of non interest income relative to private domestic banks public sector banks earn significantly less fee income while foreign banks report higher fee income public sector banks with higher levels of governmental ownership are significantly less likely to pursue non interest income sources fee based income significantly reduces risk measured by profitability variables for public sector banks default risk is also reduced for these banks from a regulatory perspective it appears that diversification benefits india s public sector banks our research has implications for the changes in the risk profile for banks in emerging banking markets pursuing non interest revenue sources

the high cost of incompletely funding the fslic shortage of explicit capital a useful parallel can be drawn between the alaskan oil spill of 1989 and the flood of red ink spilled in recent years by u s thrift institutions savings and loan associations and savings banks in each case initial damage from the spill was severely compounded by delaying and mishandling the clean up required for more than a decade federal officials refused to acknowledge that the thrift ink spill had compromised the integrity of the supporting deposit insurance fund instead of promptly shoring up the finances of this fund officials used accounting smoke and mirrors to cover up the fund s secularly increasing capital shortage this prolonged refusal to face up to the magnitude of the underfunding imposed enormous costs on society as a whole

the deer hunter the unintended effects of hunting regulations abstract to control the deer population state game commissions regulate the types of deer that can be legally harvested these regulations however might have an unintended effect on hunting related accidents by changing the care hunters take when firing their rifles a moral hazard effect or changing the composition of hunters using detailed data on hunting accidents and regulations in pennsylvania counties from 1990 to 2005 we find compelling evidence that harvesting restrictions increase the care hunters take in a manner consistent with moral hazard thus these regulations have a positive safety externality

insuring banks against liquidity shocks the role of deposit insurance and lending of last resort it has long been recognized that banks simultaneous provision of monitoring and liquidity services is advantageous but leaves them susceptible to liquidity shocks that may culminate in a system failure because a system failure is costly this provides a rationale for adopting arrangements including a lender of last resort and deposit insurance di to insure banks against liquidity shocks these arrangements have proven themselves very successful but they have also been the source of problems researchers have identified some of the main sources of these problems and have suggested ways to improve the design of these arrangements but there are still many issues that remain unaddressed this paper reviews the literature on the two arrangements that most countries have adopted to insure banks against liquidity shocks a lender of last resort and di and compares the design of these arrangements across countries the paper ends with a brief summary of the key lessons learned about the design of these arrangements and the issues related to them that remain unaddressed copyright blackwell publishers ltd 2006

privatization competition and supercompetition in the mexican commercial banking system abstract much literature before and after the privatization of mexico s commercial banking system in 1991 1992 argued that the system was collusive and noncompetitive and would likely continue to be for years banks would collude to underloan so that at least in comparison with what would happen in a competitive system they could overcharge because a parallel literature on lending after bank privatization suggests that the problem is often not too little but too much we resolved to test for competitive behavior in the mexican banking system using an empirical approach developed by shaffer econom lett 29 1989 321 j money credit bank 25 1993 49 federal reserve bank of philadelphia working paper no 93 28r we find a structural break in the middle of the privatization period that signals the start of an episode of what shaffer calls supercompetitive behavior in such a supercompetition banks run at levels of output where marginal cost exceeds marginal revenue this behavior is consistent with a struggle in which banks take losses now because they think the market share they get in the bargain offers a positive present value of expected future return the behavior can also be consistent with just the sort of banking crises that ensued in mexico

taxes and bank capital structure this paper shows that a reduction in tax discrimination between debt and equity funding leads to better capitalized financial institutions the paper exploits exogenous variation in the tax treatment of debt and equity created by the introduction of a tax shield for equity the results demonstrate that a more equal treatment of debt and equity increases bank capital ratios driven by an increase in common equity the change also leads to a significant reduction in risk taking for ex ante low capitalized banks overall the findings suggest that tax shields could be a valuable and innovative policy tool for bank regulators

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

dealer balance sheets and bond liquidity provision abstract do regulations decrease dealer ability to intermediate trades using a unique dataset of dealer bond level transactions we link changes in liquidity of individual u s corporate bonds to dealers transaction activity and balance sheet constraints we show that prior to the financial crisis bonds traded by more levered institutions and institutions with investment bank like characteristics were more liquid but this relationship reverses after the financial crisis in addition institutions that face more regulations after the crisis both reduce their overall volume of trade and have less ability to intermediate customer trades

the hazards of expert control chief risk officers and risky derivatives at the turn of the century regulators introduced policies to control bank risk taking many banks appointed chief risk officers cros yet bank holdings of new complex and untested financial derivatives subsequently soared why did banks expand use of new derivatives we suggest that cros encouraged the rise of new derivatives in two ways first we build on institutional arguments about the expert construction of compliance suggesting that risk experts arrived with an agenda of maximizing risk adjusted returns which led them to favor the derivatives second we build on moral licensing arguments to suggest that bank appointment of cros induced organizational licensing leading trading desk managers to reduce policing of their own risky behavior we further argue that ceos and fund managers bolstered or restrained derivatives use depending on their financial interests we predict that ceos favored new derivatives when their compensation rewarded risk taking but that both ceos and fund managers op

risk based capital requirements and bank portfolio risk abstract we construct a linear programming model and analyze the effectiveness of r b capital adequacy standards when bank deposits are fully insured we derive a set of optimal asset risk weights given a constraint in raising equity and using these weights the r b capital plan is an effective regulation mechanism without a constraint on equity maximum leverage restrictions and r b capital plans are mutually exclusive alternatives as we deviate from the optimal risk weights a combination of a leverage restriction and a r b equity ratio seems to be the more appropriate approach to controlling bank portfolio risk

the impact of contingent liability on commercial bank risk taking abstract from 1863 1935 regulators imposed contingent liability on bank shareholders to discourage risk taking using data from 1900 to 1915 i find that banks subject to stricter liability rules have lower equity and asset volatility hold a lower proportion of risky assets and are less likely to increase their investment in risky assets when their net worth declines consistent with the hypothesis that stricter liability discourages commercial bank risk taking these findings provide lessons for current bank regulatory policy and show that the shape of the residual claimant s payoff function has a significant impact on managerial incentives and firm performance

managing efficient capital allocation with emphasis on the chinese experience responsible risk management is central to banking ethics with the 1999 publication of the basel committee s proposal basel ii for a new capital accord to replace the 1988 agreement basel i an attempt has been made to address the problem of correlating banks risk management with their capital requirements the basel ii framework finalised in june 2004 is designed to improve risk management by using models based on past performance to help set the amount of capital banks are required to hold by regulators with the purpose of improving the efficiency of capital allocation the objectives of this study are to investigate how banks generally but particularly those located in china could improve their risk management systems and what the implications of these new regulations are for them three relevant propositions were formulated namely basel ii will improve risk management basel ii will improve capital allocation efficiency and compliance with advanced risk management systems is biased in favour of the large banks evidence was assembled with which to evaluate these three propositions by gathering relevant primary data by means of a representative survey of chinese banking executives involved in risk management the findings strongly support the first two of the above propositions and partly support the third proposition

double liability and bank risk taking this paper examines double liability as it existed in the united states prior to the great depression and assesses its impact upon bank risk taking under double liability shareholders of failing banks could lose in addition to the initial purchase price of shares an amount equal to the par value of shares owned this paper assesses whether or not banks chartered in states with double liability laws undertook less risk than banks operating under conventional limited liability the results suggest that double liability did reduce bank risk taking but did not guarantee bank stability in times of widespread financial distress

market discipline and deposit insurance reform in japan abstract on april 1 2002 the japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits this paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline i find that the reform raised the sensitivity of interest rates on deposits and that of deposit quantity to default risk in addition the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks these results suggest that the deposit insurance reform enhanced market discipline in japan i also find however that too big to fail tbtf policy became a more important determinant of interest rates and deposit allocation after the reform thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline

do capital adequacy requirements reduce risks in banking abstract in a dynamic framework it is shown that capital adequacy rules may increase a bank s riskiness in addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered the intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank if raising equity is excessively costly the only possibility to increase equity tomorrow is to increase risk today

who pays for bank insolvency this paper discusses proposals for handling bank failures in a manner that is rapid enough to allow the business to continue respects the ranking of claims makes none of the parties worse off than under traditional insolvency and does not require taxpayer funds except to guarantee the new organization until recapitalization it considers the relationship between the regime for bank exit and the rest of the framework for regulation and supervision the role of market discipline in enabling solutions before the point of insolvency is reached the problems in assessing the costs of different exit regimes and public intervention

deposit insurance regulation and moral hazard in the thrift industry evidence from the 1930 s this paper compares risk taking of insured and uninsured thrifts operating under strict and less strict regulatory regimes during the 1930 s analysis of balance sheet data indicates that while newly insured thrifts undertook less risk than their uninsured counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively permissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively premissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts given the current system of deposit insurance the results suggest that effective regulation and supervision will play a key role in maintaining thrift stability in the 1990s copyright 1992 by american economic association

financial development and pathways of growth state branching and deposit insurance laws in the united states 1900 1940 abstract this paper studies the effect of state level banking regulation on financial development and on components of state level growth in the united states from 1900 to 1940 we use these banking laws to assess the findings of a large recent literature that has argued that financial development contributes to economic growth we contend that the institutional mechanism leading to financial development is important in determining its consequences and that some types of financial development can even retard economic growth for the united states from 1900 to 1940 we argue that the financial expansion induced by expanded bank branching accelerated the mechanization of agriculture and spurred growth in manufacturing in contrast financial expansions induced by state deposit insurance had negative consequences for both the agricultural and manufacturing sectors

corporate social strategy competing views from two theories of the firm this paper compares two theories of the firm used to interpret firms corporate social strategies in order to derive new insights and questions in this research area researchers from many branches of strategic management agree that firms can strategically allocate resources in order to achieve both long term social objectives and competitive advantage however despite some progress in investigating corporate social strategy studies rely on fundamentally diverging theoretical approaches this paper will identify compare and begin to integrate two competing theories of the firm implicit in corporate social strategy scholarship the resource based and behavioural theories of the firm i discuss the implications of these two theories for both researchers and practitioners on key debates within corporate social strategy and conclude by suggesting several fruitful avenues for future research based on the emerging integration of these two theories of the firm within the strategy literature

are scale economies in banking elusive or illusive evidence obtained by incorporating capital structure and risk taking into models of bank production abstract this paper explores how to incorporate banks capital structure and risk taking into models of production in doing so the paper bridges the gulf between 1 the banking literature that studies moral hazard effects of bank regulation without considering the underlying microeconomics of production and 2 the literature that uses dual profit and cost functions to study the microeconomics of bank production without explicitly considering how banks production decisions influence their riskiness various production models that differ in how they account for capital structure and in the objectives they impute to bank managers cost minimization versus value maximization are estimated using u s data on highest level bank holding companies modeling the bank s objective as value maximization conveniently incorporates both market priced risk and expected cash flow into managers ranking and choice of production plans estimated scale economies are found to depend critically on how banks capital structure and risk taking are modeled in particular when equity capital in addition to debt is included in the production model and cost is computed from the value maximizing expansion path rather than the cost minimizing path banks are found to have large scale economies that increase with size moreover better diversification is associated with larger scale economies while increased risk taking and inefficient risk taking are associated with smaller scale economies

corruption soundness of the banking sector and economic growth a cross country study abstract this paper explores the impact of corruption on both the banking sector and economic growth we determine the impact using 76 macroeconomic data from various countries over the period 2002 2004 the results of various cross sectional regressions provide substantial evidence that corruption significantly aggravates the problems with bad loans in the banking sector in this study we also find some evidence of a new channel through which corruption lowers economic growth corruption distorts the allocation of bank funds from normal projects to bad projects which decreases the quality of private investments hence it decreases economic growth

can regulators allow banks to set their own capital ratios abstract basel regulators have received widespread criticism for failing to prevent two credit crises that hit the u s over the last two decades nonetheless banks were considerably overcapitalized prior to the onset of the 2007 2009 subprime crisis compared to those which had undergone the 1990 1991 recession therefore if capital requirements were achieved prior to the subprime crisis how could the basel framework be blamed again for having accelerated if not caused another credit crunch we find that the answer to this question lies in the relationship between the capital ratio and the leverage ratio which is governed by risk weights categories determined by the basel regulation we show that changes to risk weight categories which affect the correlation pattern between both ratios are not reflected in the subprime crisis this minimizes the implication of the basel ii regulation in the crunch that succeeded its announcement in contrast to basel i we demonstrate that these dynamics are governed by a formula linking the two ratios together which derives from the sensitivity of the risk based capital ratio to a change in its risk weight s one implication of our work regarding the basel iii regulation consists in validating the newly established capital increments in a mathematical rather than heuristical approach

the culture of policy making in the transition from socialism price policy in mongolia in this article we argue that the history of policy making can deeply influence current economic policy decisions in reforming socialist countries history s impact lies beyond the rigidity of inherited organizations it acts separately from the inherited allocation of power and property rights notions and practices that are a product of past historical experience are an autonomous force in the development of policy and they endure even when policymakers deeply desire change many labels could be attached to the phenomena we describe we have chosen the word culture because the most common interpretation of that term captures the essence of what we hope to convey the central element of culture a common set of beliefs and practices resulting from a shared historical experience is exactly the phenomenon on which we focus as explained in section ii our treatment of culture is consistent with standard methodology applied to a setting in which informational and learning processes are all important in fact our conclusions on mongolian price policy exemplify douglass c north s point that the historically derived perceptions of the actors shape the choices that they make and the imperfect and fumbling efforts of the actors reflect the difficulties of deciphering a complex environment with the available mental constructs ideas theories and ideologies 2 the article s stimulus was provided by observation of the tortuous progress of price reform in mongolia with much fanfare mongolia s government proclaimed a policy of rapid and complete price liberalization the commitment to liberalization was both genuine and widespread there was a general aspiration within society to move to a market economy however in the turn from abstraction to action the details of legislation the rules embodied in regulations and policy

risk taking behavior of banks under regulation abstract this paper analyzes the value maximization of regulated banks within a moral hazard framework in the model regulators monitor both the capital ratio and the asset portfolio and banks simultaneously select the optimum capital ratio and asset portfolio a key assumption is that a bank cannot expect a positive put option value once it is classified as risky by regulators the optimum values of the two variables depend on investment opportunities and charter values as well as regulatory parameters the model that explicitly incorporates regulation can explain various phenomena that are seemingly inconsistent with the predictions of moral hazard models for example a positive relationship between the capital ratio and the riskiness of the asset portfolio a particularly interesting result is that a larger charter value results in a higher risk interior solution

insurance by government or against government overview of public risk management policies in what contexts is it desirable that the government rather than the private sector takes on the role of an insurer and helps people reduce risks our discussion implies that while in a number of areas individuals benefit from well designed insurance provided by their government ill designed public policies for example existing pay as you go pension systems force individuals to insure against their government it is further discussed how governments could improve their risk managing role in many areas by using income contingent loans provided the country has high quality institutions and governance such loans to artists sportspeople flood victims or collapsing financial institutions would replace the existing nonrepayable transfers grants subsidies and bailouts using a simple efficiency equity sustainability framework for comparing income contingent schemes with conventional public and private insurance policies we document that this would enable governments to extend their insurance assistance to a greater number of people and institutions in a way that is not only equitable but also efficient and fiscally sustainable

bank capital and equity investment regulations abstract this paper uses an intermediation model to study the efficiency and welfare implications of both banks minimum required capital asset ratio and the regulation that limits and in some countries forbids banks investments in the equity of nonfinancial firms there are two sources of moral hazard in the model one between the bank and the provider of deposit insurance and the other between the bank and an entrepreneur who demands funds to finance an investment project among other things the paper shows that capital regulation improves the bank s stability and can also be pareto improving equity regulation is never pareto improving and does not increase the bank s stability

regulatory sanctions on independent directors and their consequences to the director labor market evidence from china we investigate the regulatory sanctions imposed on independent directors for their firms financial frauds in china these regulatory sanctions are prima facie evidence of significant lapses in business ethics during the period 2003 2010 302 person time independent directors were penalized by the regulator the china securities regulatory commission the csrc and the two stock exchanges we find that the independent directors with accounting experiences are more likely to be penalized by the csrc though they do not suffer more severe penalties than do the other sanctioned independent directors we also find that independent directors suffer less severe penalties than do the insider directors these results are consistent with the hypothesis that the sanctions on independent directors are tied to their assumed ethical and legal responsibilities following a regulatory sanction penalized independent directors experience a significant decline in the number of other board seats held however they can gain board seats in better quality firms we find that interlocked firms that share penalized independent directors with the fraud firm do not suffer from a valuation decline overall our results suggest that regulatory sanctions have not triggered further sanctions on the penalized directors in the labor market but they have instead created a disincentive for these directors to serve on the company boards of high risk firms

a financial economic evaluation of insurance guaranty fund system an agency cost perspective abstract recent occurrences of financial distress to some insurers have raised questions about whether the current guaranty system is adequate to protect policyholders four new systems have been proposed using the state preference model it was found the stewart s national system faring the best if it adopts uniform regulation based on agency theory the pre assessment approach and the policyholder surcharge or premium increase recoupment method were found to be better than the current post assessment approach and premium tax offset method furthermore uniform policy limits and regulations are recommended

which banks choose deposit insurance evidence of adverse selection and moral hazard in a voluntary insurance system this article investigates adverse selection and moral hazard in the voluntary deposit insurance system of kansas which operated from 1909 to 1929 regulations were imposed to limit risk taking and membership was made voluntary to assuage objections that insurance forces conservative banks to protect depositors of high risk institutions the authors find however that risk prone banks were the most likely to join the system at its inception using a simultaneous equations model they also detect both adverse selection and moral hazard behavior throughout the system s first ten years copyright 1995 by ohio state university press

bank capital and lending relationships this paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for lending relationships bank capital and the provision of credit i find that bank dependent firms borrow from well capitalized banks while firms with access to the bond market borrow from banks with less capital this matching of bank dependent firms with stable banks smooths cyclicality in aggregate credit provision and mitigates the effects of bank shocks on the real economy

the effect of bank failures on economic activity evidence from u s states in the early 20th century this paper provides evidence documenting the existence of a bank failure channel the magnifying effect of bank failures on economic distress using state level quarterly time series from 1900q1 to 1929q4 we estimate a vector autoregression model of bank failures for each state the forecast error variance decompositions are used to construct a categorical measure of the bank failure channel we examine the influence of regulatory variables economic conditions and banking conditions on the degree to which bank failures propagate distress state sponsored deposit insurance and minimum capital requirements are important for explaining the likelihood of having a bank failure channel

accounting for banks capital regulation and risk taking this paper examines risk taking incentives in banks under dierent accounting regimes with capital regulation in the model the bank s decisions of capital issuance and investment policy are jointly determined given exogenous minimum capital requirement the bank is more likely to issue equity capital in excess of the minimum required level and implement less risky investment policy under either lower of cost ormarket accounting or fair value accounting than under historical cost accounting but fair value accounting may induce more risk taking compared to lower of cost or market accounting due to short term interest in the part of the bank however the disciplining role of lower of cost or market accounting may discourage bank s incentive to exert project discovery eort

i didn t know and i was only doing my job has corporate governance careened out of control a case study of enron s information myopia this paper discusses internal dynamics of the firm that contribute to the failure of knowledge conditions using the enron scandal as a case study ability of the board to effectively monitor conduct at operational levels includes various dynamics senior management being isolated from those at operational levels individuals pursuing subgoals that are contrary to overall corporate goals information flow along a narrow linear channel that effectively forecloses adverse information from getting to senior management a corporate culture of intimidation discouraging open expressions of doubt or skepticism resulting in reluctance to challenge senior officials and pushing the limits of ethics and the law

can an islamic model of housing finance cooperative elevate the economic status of the underprivileged abstract a formal home loan is onerous to subprime borrowers in efficient markets this can deter home ownership for financially strapped individuals leading to a market failure this paper proposes a special form of cooperative mortgage financing practiced in oman to overcome this market failure we integrate the literature of mortgage design with that of informal savings schemes i e roscas ascras to illustrate that this mode of financing dissipates credit risk better than the

a reexamination of mean variance analysis of bank capital regulation abstract the mean variance framework has been used to analyze the effects of bank capital regulation on the asset and bankruptcy risk of insured utility maximizing banks this literature claims that more stringent capital regulation will increase asset risk and can increase bankruptcy risk these conclusions are notable because they are opposite to those obtained for insured value maximizing banks in this paper we show that the utility maximization literature does not support its conclusions regarding the effects of bank capital regulation because it has mischaracterized the bank s investment opportunity set by neglecting the option value of deposit insurance

the financial crisis and bank client relationships foreign ownership transparency and portfolio selection abstract using a unique dataset that matches banks with their client firms we investigate the differences between foreign and domestic banks in a developing country in particular we are interested in examining how foreign banks solve the information asymmetries that characterize lending relationships and whether those relationships have changed since the financial crisis of 2008 foreign banks are likely to limit their lending activity to larger firms or more transparent firms because they are at an informational disadvantage relative to domestic banks we find that foreign banks focus on relationships with foreign listed and larger firms in addition their portfolio is more heavily weighted towards firms in less competitive industries and exporting firms comparing outcomes for 2006 and 2009 we find that banks are more concerned with leverage in 2009 and have reduced the number of firms in their portfolio post crisis

a simple approach to better deposit insurance pricing abstract we examine the ability of simple insurance pricing schedules to match premiums with the values derived from a contingent claim model of deposit insurance we use a quadratic loss function to compare a flat rate pricing system to alternative pricing schedules incorporating measures of risk a simple two bracket schedule that distinguishes between high and low capitalization is a substantial improvement a pricing schedule under which the rate paid by low capital banks depends on their degree of undercapitalization is better still in addition the gains from using market value measures of capital rather than book value are great

deposit insurance and subsidized recapitalizations the 2007 2009 financial crisis saw a vast expansion in deposit insurance guarantees around the world and yet our understanding of the design and consequences of deposit insurance schemes is in its infancy we provide a new rationale for the provision of deposit insurance in our model the banking sector exhibits both adverse selection and moral hazard which implies that the social benefits of bank monitoring must for incentive reasons be shared between depositors and banks consequently socially too few deposits are made in equilibrium deposit insurance or equivalently bank recapitalization corrects this market failure we find that deposit insurance should be funded not by banks or depositors but out of general taxation the optimal level of deposit insurance varies inversely with the quality of the banking system hence when the soundness of the financial sector is uncertain governments should consider supporting deposit insurance schemes and undertaking subsidized recapitalizations

fairly priced deposit insurance and bank charter policy the thrust of current deposit insurance reform risk based insurance premiums and capital requirements is an effort to price deposit insurance more fairly fairly pricing deposit insurance eliminates inequitable wealth transfers but it does not lead to an efficient equilibrium this paper shows that an alternative charter policy results in an efflcient separating equilibrium this article analyzes the effect of alternative charter policies when deposit insurance is fairly priced the thrust of current deposit insurance reformrisk based capital requirements 1988 and risk based insurance premiums 1994 is an effort to price deposit insurance more fairly chan greenbaum and thakor s 1992 seminal paper dramatically illustrated that fairly pricing deposit insurance is not enough to solve the deposit insurance problem in their model when banks hold nontraded private information assets no equilibrium exists with fairly priced deposit insurance unless banks earn rent or are subsidized fairly pricing deposit insurance eliminates inequitable transfers of wealth but it does not lead to an efficient equilibrium this paper shows that an alternative charter policy gives an efficient separating equilibrium the separating equilibrium segregates the market for insured transactions deposits from private information financial intermediation the analysis in this article provides support for the deposit insurance reform proposal in the recent 1993 national commission on financial institution reform recovery and enforcement ncfirre report to the president and congress and for merton and bodie s 1993 proposal both proposals impose a separating equilibrium that isolates insured transactions accounts and the public information traded assets that secure them from private information assets in the bank s portfolio the formal model developed here is designed to demonstrate the effect of charter policy on the efficiency of market equilibrium in an uncomplicated setting but the main result that a separating equilibrium is more efficient is extremely robust with respect to the model specification the model has two types of financial intermediaries intermediaries that hold nontraded private

valuation and systemic risk consequences of bank opacity abstract we examine the effects of opacity on bank valuation and synchronicity in bank equity returns over the years 2000 2006 prior to the 2007 financial crisis as expected investments in opaque assets are more profitable than investments in transparent assets and taking profitability into account have larger valuation discounts relative to transparent assets the valuation discounts on opaque asset investments decline over the 2000 2006 period only to be followed by a sharp reversal in 2007 the decline is coincident with a rise in bank equity share prices decrease in transparent asset holdings by banks and greater return synchronicity evidence consistent with a feedback effect

the role of local depositors in controlling expenses in small scale financial intermediation an empirical analysis using data on irish loan funds a nineteenth century quasi bank system we explore how the capital structure affects managerial agency to impact non interest expenses these organizations had no equity holders and were financed by deposits and capital comprising donations and accumulated profits creating problems of managerial moral hazard higher net income before non interest expenses is associated with higher salaries and other non interest expenses more surprisingly higher capital deposit ratios led to higher expenses even after controlling for net income while this institution is unique the findings suggest that depositors could assist in controlling expenses in microfinance organizations

deposit insurance and the risk premium in bank deposit rates abstract by placing a ceiling on the amount of possible depositor loss deposit insurance should result in a lower deposit risk premium however this effect may be modified if either the insurance promise has low credibility or the moral hazard incentives generated by deposit insurance result in a greater probability of bank default using financial and institutional panel data from thirteen countries we find that the risk premium is over 40 basis points higher on average in uninsured countries than in countries that offer insurance up to some pre specified maximum however the risk premium has a non linear relationship with the level of maximum insurance coverage suggesting that the market recognizes the moral hazard potential moreover the effect of deposit insurance on the risk premium is weaker in countries with strong creditor rights consistent with the view that investors view the latter as a substitute for explicit deposit insurance

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

capital regulation heterogeneous monitoring costs and aggregate loan quality abstract this paper develops a banking sector framework with heterogeneous loan monitoring costs banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to eliminate this exposure after analyzing an unregulated banking system we examine several cases in which regulatory capital requirements bind the notional loan supplies of various subsets of banks to gauge the impact of capital requirements we define loan quality in terms of either the ratio of monitored to total loans or the ratio of monitoring banks to total bank population under the assumption of a specific cross sectional distribution of banks our simulations show that the imposition of binding capital requirements on a previously unregulated banking system unambiguously increases the market loan rate and reduces aggregate lending but has an ambiguous effect on loan quality nevertheless once capital requirements are in place the simulations indicate that regulators can contribute to higher overall loan quality by toughening capital requirements

the moderating role of capital on the relationship between bank liquidity creation and failure risk abstract we examine the role of bank capital in moderating the relationship between bank liquidity creation and the failure risk in u s banks over the period of 2003 2014 we find that conditional on bank capital bank liquidity creation is related to bank failure risk negatively the negative relationship is moderated positively i e strengthened by changes in bank capital this finding is consistent with the view that banks may strengthen their solvency through increased capital in response to the illiquidity risk associated with liquidity creation and higher capital enhances the ability of banks to create liquidity the result is robust to different estimation methods and alternative measures of liquidity creation bank failure risk and bank capital further analysis shows that the significant and negative effect is more prominent for small banks and the impact of bank capital was more pronounced during the recent financial crisis of 2007 2009

deposit insurance and bank failures new evidence from the 1920s this paper examines the contribution of deposit insurance to bank failures during the 1920s using individual bank data from kansas where membership in the state insurance system was voluntary i find that the balance sheets of insured banks reflected greater risk taking and probit model estimates indicate that insured banks were more likely to fail than non insured banks insurance had an especially strong impact the closer a bank was to failure because regulation was comparatively strict in kansas the findings suggest that deposit insurance had an even greater impact in other states and in the recent u s experience

capital regulation and bank risk taking a note abstract this paper examines theoretically the effects of more stringent capital regulation on bank asset portfolio risk the analysis shows that for a value maximizing bank incentives to increase asset risk decline as its capital increases thus as long as regulatory efforts to contain asset risk and size are not reduced more stringent capital regulation unambiguously reduces the expected liability of the deposit insurance system

deposit insurance and risk taking behavior in the credit union industry abstract this paper examines the relationship between deposit insurance and risk taking behavior within the credit union industry time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk taking hypothesis although federal credit union capital declined immediately following the adoption of deposit insurance this was most likely the result of reduced capital requirements not deposit insurance liquidity and loan delinquency ratios had a negative time trend coefficient implying a decline in risk taking behavior during the post insurance period cross sectional test results employing iowa state chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts overall there was no evidence that the adoption of deposit insurance increased the risk taking behavior of credit unions

bank runs deposit insurance and capital requirements diamond and dybvig provide a model of intermediation in which deposit insurance can avoid socially undesirable bank runs we extend the diamond dybvig model to evaluate the costs and benefits of deposit insurance in the presence of moral hazard by banks and monitoring by depositors we find that complete deposit insurance alone will not support the first best outcome depositors will not have adequate incentives for monitoring and banks will invest in excessively risky projects however an additional capital requirement for banks can restore the first best allocation

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

do federal home loan bank membership and advances increase bank risk taking since the early 1990s commercial banks have turned to federal home loan bank fhlbank advances to plug the gap between loan and deposit growth is this trend worrisome on the one hand advances implicitly encourage risk by insulating borrowers from market discipline on the other advances give borrowers greater flexibility to managing interest rate and liquidity risk and access to fhlbank funding encourages members to reshape their balance sheets in ways that could lower credit risk using quarterly financial and supervisory data for banks from 1992 to 2005 we assess the effect of fhlbank membership and advances on risk the evidence suggests liquidity and leverage risks rose modestly but interest rate risk declined somewhat credit risk and overall failure risk were largely unaffected although the evidence suggest fhlbank membership and advances have had at best only a modest impact on bank risk we caution that our sample period constitutes one observation and that moral hazard could be pronounced if leverage ratios revert to historical norms

unintended consequences of the market risk requirement in banking regulation abstract we analyze a bank that operates under the basel credit and market risk requirements and that maximizes its value through recapitalizations dividends and liquid asset investments according to our model the market risk requirement may postpone recapitalization and this way increase the bank s default probability we show that this is indeed the case if the expected return and volatility of the liquid asset portfolio are high i e then the market risk requirement raises the default probability of the bank in this sense the market risk requirement is inefficient

bank bailouts and moral hazard evidence from germany we use a structural econometric model to provide empirical evidence that safety nets in the banking industry lead to additional risk taking to identify the moral hazard effect of bailout expectations on bank risk we exploit the fact that regional political factors explain bank bailouts but not bank risk the sample includes all observed capital preservation measures and distressed exits in the german banking industry during 1995 2006 a change of bailout expectations by two standard deviations increases the probability of official distress from 6 6 to 9 4 which is economically significant

ownership structure market discipline and banks risk taking incentives under deposit insurance the paper studies the effects of market discipline by creditors and ownership structure on banks risk taking in the presence of partial deposit insurance an agency cost model explains how the effects of creditor discipline and shareholder control arc interdependent the non monotonic effect of shareholder control and the role of leverage panel regressions on several hundred banks worldwide 1995 2005 confirm a negative individual risk effect of creditor discipline and the expected convex effect of shareholder control increased shareholder control significantly strengthens the negative effect of market discipline on asset risk but joint effects on overall default risk are limited c 2011 elsevier b v all rights reserved