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on Regulation |
| By: | TCHANA TCHANA , Fulbert |
| Abstract: | This paper brings together and adds structure to the empirical literature on the link between banking regulation and banking system stability. In addition to clarifying the theoretical underpinnings for studying banking regulation, it points to several directions for future empirical research, necessary to fill the gaps in our understanding of the link between banking regulation and stability. The paper starts with a review of the literature on the design of banking regulation and its link with stability, followed by an assessment of the most common methodologies used in this literature.The paper then reviews the empirical literature of various banking regulations. This is followed by a proposal on the new directions for research of the link between banking regulation and banking system stability. |
| Keywords: | Banking Stability; Banking Regulation |
| JEL: | G28 G21 |
| Date: | 2008–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9298&r=reg |
| By: | TCHANA TCHANA , Fulbert |
| Abstract: | This paper assesses empirically whether banking regulation is effective at preventing banking crises. We use a monthly index of banking system fragility, which captures almost every source of risk in the banking system, to estimate the effect of regulatory measures (entry restriction, reserve requirement, deposit insurance, and capital adequacy requirement) on banking stability in the context of a Markov-switching model. We apply this method to the Indonesian banking system, which has been subject to several regulatory changes over the last couple of decades, and at the same time, has experienced a severe systemic crisis. We draw from this research the following findings: (i) entry restriction reduces crisis duration and also the probability of their occurrence; (ii) larger reserve requirements reduce crisis duration, but increase banking instability; (iii) deposit insurance increases banking system stability and reduces crisis duration. (vi) capital adequacy requirement improves stability and reduces the expected duration of banking crises. |
| Keywords: | Banking Crises; Banking System Fragility Index; Banking Regulation; Markov Switching Regression |
| JEL: | G28 C25 G21 |
| Date: | 2008–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9299&r=reg |
| By: | Tatom, John / A. |
| Abstract: | In 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Act provided for risk-based deposit insurance premiums, put explicit limits on the application of a “too big to fail” principle for banks and required that examiners implement “prompt corrective action” (PCA) standards for banks. Essentially these steps were to improve the functioning of the FDIC, especially removing discretion of the examiners in the process of addressing the risk of failure of banks and providing explicit requirements of managing the deteriorating risk of failure and providing for rising insurance premiums for such banks. In particular, PCA established a set of capital benchmarks and required regulator actions that removed privileges for banks to manage their capital and payments of income to share holders and bank creditors as the capital position of the bank deteriorated and the risk of failure rose. In effect regulators could take preemptive action to keep banks from depleting their capital as their capital positions deteriorate. These provisions have drawn increasing public attention in the past year for very different reasons. First, Senate Bill 40, The National Insurance Act (NIA), which provides new opportunities for insurance companies to obtain their charters and to be regulated by a federal government entity instead of only the state governments, also requires that the new federal regulator develop and apply prompt corrective action provisions to the supervision of federally chartered insurance companies. The second reason that these provisions have drawn attention recently is the near failure and sale of Bear Stearns. The Federal Reserve helped arrange the sale of Bear Stearns in March 2008, with the sale to be completed shortly, to preempt its failure and consequent effects on other financial institutions. At about the same time the U.S. Department of Treasury released it long awaited “Blueprint for a Modernized Federal Financial Regulatory Structure,” that called for the Board of Governors of the Federal Reserve System to have broad regulatory power over all financial institutions on issues related to financial market stability. These actions call attention to the absence of regulatory oversight powers by the Fed, in particular, enabling legislation that would allow the Fed to close investment banks or other failed or failing institutions in the same way that they can or must close such banks. PCA is on the horizon for insurance companies, investment banks and other financial institutions subject to regulation. |
| Keywords: | Prompt corrective action; capital requirements; financial regulatory reform; Basel II |
| JEL: | G22 G28 G21 |
| Date: | 2008–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9327&r=reg |
| By: | Michael Graff (KOF Swiss Economic Institute, ETH Zurich) |
| Abstract: | The "law and finance theory" predicts that the common law system provides the best basis for financial development and economic growth, followed by Scandinavian and German origin civil law and finally French origin civil law. This paper summarises the key points of the theory as well as a number of sceptical views. Moreover, it argues that the theory faces an identification problem, since the majority of common law countries have a market-based financial system, whereas the majority of civil law countries have a bank-based financial system. Furthermore, it is shown that one of the corner stones of the law and finance theory, its proposition that a common legal tradition implies a similar set of legal rules and procedure to protect financial investors, does not hold empirically. Last but not least, it is shown that recent additions to the theory's creditor right indicators data pool are eliminating the (weak) correspondence between business law and legal family that could be found in the original data set. Accordingly, the theory's claim that creditor protection is largely determined by the legal tradition of a particular country has to be reconsidered. |
| Keywords: | Legal Tradition, Creditor Rights |
| JEL: | K22 G20 P00 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:08-197&r=reg |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa) |
| Abstract: | In this paper, we develop a dynamic general equilibrium overlapping generations monetary endogenous growth model of a financially repressed small open economy characterized by bureaucratic corruption, and, in turn, analyze optimal policy decisions of the government following an increase in the degree of corruption. Unlike as suggested in the empirical literature, we find that increases in the degree of corruption should ideally result in a fall in seigniorage, as an optimal response of the benevolent government. In addition, higher degrees of corruption should also be accompanied with lower levels of financial repression. |
| Keywords: | Bureaucratic Corruption, Macroeconomic Policy, Openness |
| JEL: | D73 E63 F43 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200817&r=reg |
| By: | Olivier L'Haridon (GREG-HEC and University Paris Sorbonne); Franck Malherbet (THEMA - CNRS - Université de Cergy-Pontoise, IZA and fRDB) |
| Abstract: | The design of employment protection legislation (EPL) is of particular importance in the European debate on the contours of labor market reform. In this article we appeal to an equilibrium unemployment model to investigate the virtues of EPL reform which reduces the red tape and legal costs associated with layoffs and introduces a U.S.-style experience- rating system, which we model as a combination of a layoff tax and a payroll subsidy. The reform considered shows that it is possible to improve the efficiency of employment protection policies without affecting the extent of worker protection on the labor market. These results are consistent with the conventional wisdom that experience rating is desirable, not only as an integral component of unemployment-compensation finance, as most studies acknowledge, but also as part and parcel of a virtuous EPL system. |
| Keywords: | Search and Matching Models, Employment Protection, State-Contingent Layoff Tax, Experience-Rating |
| JEL: | J41 J48 J60 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-26&r=reg |