{"title":"Too Big to Fail and Optimal Regulation","authors":"Chang Ma, Hai Nguyen","doi":"10.2139/ssrn.2724909","DOIUrl":"https://doi.org/10.2139/ssrn.2724909","url":null,"abstract":"Abstract This paper analyzes the optimal regulation for “Too Big to Fail” (TBTF) in a simple model. As the government cannot credibly commit to no bail-out during crises, banks have an incentive to become excessively large ex-ante. In this case, no single policy can fully eliminate the inefficiencies from TBTF. The optimal regulation for the first-best allocation features a capital requirement and an issuance of Contingent Convertible Bonds (CoCos) where the former addresses the moral hazard issue from government bailouts and the latter improves risk-sharing. Moreover, a combination of the capital requirement and size regulation can implement a second-best allocation where the government has to bail out the banking sector but the social cost of bail-out is internalized by the banks. In this case, the capital requirement forces banks to internalize the bailout cost while the size regulation directly discourages banks to become large.","PeriodicalId":221700,"journal":{"name":"Financial Crisis","volume":"77 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125491641","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}
{"title":"Mutual Fund Flight-to-Liquidity","authors":"A. Rzeźnik","doi":"10.2139/ssrn.2912368","DOIUrl":"https://doi.org/10.2139/ssrn.2912368","url":null,"abstract":"This paper examines the liquidity choices of mutual funds during times of market uncertainty. I find that when markets are uncertain, mutual funds actively increase the liquidity of their portfolio – often referred to as a ‘flight-to-liquidity.’ In aggregate, mutual fund behaviour has implications for the market; the market driven flight-toliquidity places upward pressure on the liquidity premium. I examine the underlying mechanisms driving fund behaviour. I show that market volatility is associated with lower fund performance and withdrawals, which causes funds to adjust the composition of their portfolio towards more liquid assets in order to meet potential redemptions. This causal chain is consistent with Vayanos (2004), who argues that fund managers are investors with time-varying liquidity preferences due to threat of withdrawal. Aggregated over funds, the effect is substantial: a one standard deviation increase in my measure of flight-to-liquidity yields a 0.63 standard deviation increase in the excess return required for holding illiquid securities.","PeriodicalId":221700,"journal":{"name":"Financial Crisis","volume":"290 2","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-10-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114048308","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}
{"title":"Do FDI Firms Benefit from Related Party Transactions with Foreign Affiliates? Evidence from Korea","authors":"Sung C. Bae, T. Kwon","doi":"10.2139/ssrn.2915263","DOIUrl":"https://doi.org/10.2139/ssrn.2915263","url":null,"abstract":"We extend the existing literature on related party transactions from a domestic to an international dimension and uncover new evidence of resource transfer by FDI firms to their foreign affiliates through overseas related party transactions. Employing uniquely-constructed data of Korean firms during 2005-2010 and correcting for the endogeneity issue, we find non-positive valuation effects of such transactions for the whole sample period. Further analyses of subsamples classified by firm attributes, however, reveal that strong negative valuation effects are associated with related party transactions of FDI firms which are in the high-tech industry and whose foreign affiliates are in the emerging countries during the post-global financial crisis period. These results indicate that following the crisis, FDI firms use related party transactions as a means of transferring their resources in order to support their financially-distressed foreign affiliates in the emerging countries. We find little evidence that FDI firms use related party transactions to withdraw investment returns of their foreign affiliates back to the home country for the benefits of investing firms.","PeriodicalId":221700,"journal":{"name":"Financial Crisis","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125574673","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}
Matthieu Bouvard, Pierre Chaigneau, Adolfo de Motta
{"title":"Transparency in the Financial System: Rollover Risk and Crises","authors":"Matthieu Bouvard, Pierre Chaigneau, Adolfo de Motta","doi":"10.2139/ssrn.2075817","DOIUrl":"https://doi.org/10.2139/ssrn.2075817","url":null,"abstract":"We present a theory of optimal transparency when banks are exposed to rollover risk. Disclosing bank-specific information enhances the stability of the financial system during crises, but has a destabilizing effect in normal economic times. Thus, the regulator optimally increases transparency during crises. Under this policy, however, information disclosure signals a deterioration of economic fundamentals, which gives the regulator ex post incentives to withhold information. This commitment problem precludes a disclosure policy that provides ex ante optimal insurance against aggregate shocks, and can result in excess opacity that increases the likelihood of a systemic crisis.","PeriodicalId":221700,"journal":{"name":"Financial Crisis","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125182476","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}
{"title":"Banks’ Non-Interest Income and Systemic Risk","authors":"Markus K. Brunnermeier, G. Dong, Darius Palia","doi":"10.2139/ssrn.1786738","DOIUrl":"https://doi.org/10.2139/ssrn.1786738","url":null,"abstract":"\u0000 This paper finds noninterest income is positively correlated with the total systemic risk for U.S. banks. Decomposing total systemic risk into three components, we find that noninterest income is positively related to a bank’s tail risk, positively related to a bank’s interconnectedness risk, and an insignificantly related to a bank’s exposure to macroeconomic and finance factors. We also find that noninterest income is more volatile and negatively related to interest income. Finally, we find trading and other noninterest income to be positively correlated with systemic risk. Other noninterest income, compared with trading income, has a slightly larger economic impact. (JEL G01, G18, G20, G21, G32, G38)\u0000 Received October 31, 2019; editorial decision February 3, 2020 by Editor Andrew Ellul.","PeriodicalId":221700,"journal":{"name":"Financial Crisis","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125374650","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}
Ugo Albertazzi, Ginette Eramo, L. Gambacorta, C. Salleo
{"title":"Securitization is Not that Evil after All","authors":"Ugo Albertazzi, Ginette Eramo, L. Gambacorta, C. Salleo","doi":"10.2139/ssrn.1787174","DOIUrl":"https://doi.org/10.2139/ssrn.1787174","url":null,"abstract":"A growing number of studies on the US subprime market indicate that, due to asymmetric information, credit risk transfer activities have perverse effects on banks’ lending standards. We investigate the larger part of the market for securitized assets (“prime mortgages”). Information on over a million mortgages written in Italy, a country with a regulatory framework analogous to the one prevalent in Europe, includes loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal, including the seniority structure of the ABSs issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow a robust way to test for the effects of asymmetric information from the empirical contract theory literature (Chiappori and Salanié, 2000). Overall, our evidence suggests that banks can effectively counter the negative effects of asymmetric information in the securitization market by selling less opaque loans, using signaling devices (i.e. retaining a share of the equity tranche of the ABSs issued by the SPV) and building up a reputation for not undermining their own lending standards. the bottom-line is that securitization need not be accompanied by lower lending standards, and that securitized loans can actually be a pretty safe investment class.","PeriodicalId":221700,"journal":{"name":"Financial Crisis","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126240700","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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