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on Regulation |
| By: | Ian Christensen; Césaire Meh; Kevin Moran |
| Abstract: | This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium model with banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority. |
| Keywords: | Moral hazard, bank capital, countercyclical capital requirements, leverage, monetary policy |
| JEL: | E44 E52 G21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1140&r=reg |
| By: | Roberta Occhilupo (Banca d'Italia) |
| Abstract: | Regulatory complexity and bureaucracy inefficiencies increase the time needed and the cost of starting a business and therefore reduce the competitiveness of a country. Since the early 1990s Italy, in the same way as other developed countries, has been trying to introduce some reforms to boost the efficiency of general government and reduce bureaucracy. This has only been partially successful results. In 2010 two new reforms were introduced. The first allows an entrepreneur to start a business by electronically filing a form (named SCIA, Segnalazione Certificata di Inizio Attività ) declaring that the firm complies with all the legal requirements. The SCIA replaces ex ante with ex post public administration controls. The second reform improves the local one-stop-shops regulation (the SUAP, Sportello Unico per le Attività Produttive). This paper evaluates the effectiveness of the two reforms. The time required and the cost of starting a business can be effectively reduced only if the administrative simplification tools are coupled with other reforms that eliminate unnecessary regulatory barriers, rationalize regulation, and reorganize the public administration. |
| Keywords: | time and costs for starting a business, regulation entry, public administration control, administrative simplification |
| JEL: | D73 H7 K2 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_110_11&r=reg |
| By: | Adam Gersl; Jakub Seidler |
| Abstract: | Excessive credit growth is often considered to be an indicator of future problems in the financial sector. This paper examines the issue of how to determine whether the observed level of private sector credit is excessive in the context of the “countercyclical capital bufferâ€, a macroprudential tool proposed in the new regulatory framework of Basel III by the Basel Committee on Banking Supervision. An empirical analysis of selected Central and Eastern European countries, including the Czech Republic, provides alternative estimates of excessive private credit and shows that the HP filter calculation proposed by the Basel Committee is not necessarily a suitable indicator of excessive credit growth for converging countries. |
| Keywords: | Basel regulation, credit growth, financial crisis countercyclical buffer. |
| JEL: | G01 G18 G21 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2011/02&r=reg |
| By: | Emiliano Pagnotta; Thomas Philippon |
| Abstract: | Two forces have reshaped global securities markets in the last decade: Exchanges operate at much faster speeds and the trading landscape has become more fragmented. In order to analyze the positive and normative implications of these evolutions, we study a framework that captures (i) exchanges' incentives to invest in faster trading technologies and (ii) investors' trading and participation decisions. Our model predicts that regulation that protect prices will lead to fragmentation and faster trading speed. Asset prices decrease when there is intermediation competition and are further depressed by price protection. Endogenizing speed can also change the slope of asset demand curves. On normative side, we find that for a given number of exchanges, faster trading is in general socially desirable. Similarly, for a given trading speed, competition among exchange increases participation and welfare. However, when speed is endogenous, competition between exchanges is not necessarily desirable. In particular, speed can be inefficiently high. Our model sheds light on important features of the experience of European and U.S. markets since the implementation of Reg. NMS, and provides some guidance for optimal regulations. |
| JEL: | G12 L13 L15 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17652&r=reg |
| By: | Patrick Slovik |
| Abstract: | Bank regulation might have contributed to or even reinforced adverse systemic shocks that materialised during the financial crisis. Capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks’ focus away from their core economic functions. Tighter capital requirements based on risk-weighted assets may further contribute to these skewed incentives. The estimated macroeconomic costs of redirecting banks’ attention away from such unconventional business practices are low. During a medium-term adjustment period, for each percentage point of bank equity, regulation that is not based on risk-weighted assets would affect annual GDP growth by -0.02 percentage point more than under the risk-weighted assets framework. Refocusing banks’ attention toward their main economic functions is a core requirement for durable financial stability and sustainable economic growth.<P>Banques d'importance systémique: défis pour la réglementation du capital<BR>La réglementation bancaire pourrait avoir contribué, voire renforcé, des chocs systémiques qui se sont matérialisés lors de la crise financière. La réglementation des fonds propres fondée sur des actifs pondérés par les risques encourage l'innovation conçue pour contourner les exigences réglementaires et éloigne les préoccupations des banques de leurs principales fonctions économiques. Le resserrement des exigences en capital fondées sur les actifs pondérés du risque peut exacerber ce biais d’incitation. Des estimations suggèrent que rediriger l’activité des banques hors de telles pratiques commerciales nonconventionnelles ne serait guère coûteux. Pendant une période d'ajustement de moyen terme, pour chaque point de pourcentage du ratio de capitaux propres bancaires, une réglementation qui ne s’appuie pas sur les actifs pondérés du risque réduirait la croissance annuelle du PIB de seulement 0,02 point de pourcentage de plus qu’une réglementation fondée sur les actifs pondérés par les risques. Un recentrage de l’attention des banques vers leurs principales fonctions économiques est une exigence fondamentale pour garantir la stabilité financière et une croissance économique durables. |
| Keywords: | financial regulation, financial stability, Basel accord, Basel III, capital requirements, systemically important financial institutions, Too-big-to-fail, Bank Leverage, réglementation financière, crise financière, stabilité financière, Accord de Bâle, Bâle III, institutions financières d'importance systémique, levier bancaire |
| JEL: | G01 G21 G28 |
| Date: | 2011–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:916-en&r=reg |
| By: | Vedant Misra; Marco Lagi; Yaneer Bar-Yam |
| Abstract: | We provide direct evidence of market manipulation at the beginning of the financial crisis in November 2007. The type of manipulation, a "bear raid," would have been prevented by a regulation that was repealed by the Securities and Exchange Commission in July 2007. The regulation, the uptick rule, was designed to prevent manipulation and promote stability and was in force from 1938 as a key part of the government response to the 1928 market crash and its aftermath. On November 1, 2007, Citigroup experienced an unusual increase in trading volume and decrease in price. Our analysis of financial industry data shows that this decline coincided with an anomalous increase in borrowed shares, the selling of which would be a large fraction of the total trading volume. The selling of borrowed shares cannot be explained by news events as there is no corresponding increase in selling by share owners. A similar number of shares were returned on a single day six days later. The magnitude and coincidence of borrowing and returning of shares is evidence of a concerted effort to drive down Citigroup's stock price and achieve a profit, i.e., a bear raid. Interpretations and analyses of financial markets should consider the possibility that the intentional actions of individual actors or coordinated groups can impact market behavior. Markets are not sufficiently transparent to reveal even major market manipulation events. Our results point to the need for regulations that prevent intentional actions that cause markets to deviate from equilibrium and contribute to crashes. Enforcement actions cannot reverse severe damage to the economic system. The current "alternative" uptick rule which is only in effect for stocks dropping by over 10% in a single day is insufficient. Prevention may be achieved through improved availability of market data and the original uptick rule or other transaction limitations. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1112.3095&r=reg |
| By: | Gao, Hang; Van Biesebroeck, Johannes |
| Abstract: | We study whether the 2002 deregulation and vertical unbundling of the Chinese electricity sector has boosted productivity in the generation segment of the industry. Controlling explicitly for sources of price-heterogeneity across firms and for firm-fixed effects, we find deregulation to be associated with a reduction in labor input and material use of 6 and 4 percent, respectively. This effect only appears two years after the reforms, is robust to alternative ways of identifying restructured firms, and to the nonrandom selection of restructured firms using a matching estimator. Input use of new state-owned firms that start operations two years into the reform period does not differ significantly anymore from input use of private sector entrants. |
| Keywords: | Productivity; regulation |
| JEL: | L5 L9 O4 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8695&r=reg |
| By: | Beck, T.H.L.; Todorov, R.I.; Wagner, W.B. (Tilburg University, Center for Economic Research) |
| Abstract: | This paper analyzes the distortions that banks’ cross-border activities, such as foreign assets, deposits and equity, can introduce in the regulatory process. We find that while each individual dimension of cross-border activities distorts the incentives of a domestic regulator, a balanced amount of cross-border activities does not necessarily cause inefficiencies, as the various distortions can offset each other. In the case of imbalanced cross-border activities, a supranational regulator can improve outcomes, if her realm matches the geographic activity of banks, her capacity of extracting information is not lower than that of national supervisors, and the available resolution techniques do not cause higher external costs than under national resolution. Results from a numerical simulation exercise and empirical analysis using bank-level data from the recent crisis provide support to our theoretical findings. Specifically, banks with a higher share of foreign deposits and assets and a lower foreign equity share were intervened at a more fragile state, reflecting the distorted incentives of national regulators. |
| Keywords: | Bank regulation;bank resolution;cross-border banking. |
| JEL: | G21 G28 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011127&r=reg |
| By: | Nash, Chris (University of Leeds, UK); Nilsson, Jan-Eric (VTI); Link, Heike (DIW, Berlin, Germany) |
| Abstract: | This paper compares the experience of three European countries with long experience of competition in rail transport – Britain, Sweden and Germany. Britain is characterised by complete separation of infrastructure from operations, competition either for or in the market for the entire passenger network, open access for freight with two large operators and several smaller ones, strong regulation and careful attention to financial incentives. Sweden also has complete vertical separation, competitive tendering for all subsidised services, open access for freight and now also for commercial passenger services. Regulation, although now strengthened, is not as tight as in Britain. At the other extreme, Germany still has the dominant operator and the infrastructure company as subsidiaries to the same holding company, the regulator has had repeated disputes regarding their powers and – although there is some tendering of subsidised passenger services and open access for commercial passenger and freight – the incumbent still dominates the market. According to the general expectations of theoretical reasoning, we would expect the British approach to be the most successful in achieving an efficient, competitive rail system, with Sweden next and Germany least successful. But an examination of subsidy levels and trends in passenger and freight traffic finds that Germany has the slowest growth in public financial support for its railway as well as the lowest fares. Both Britain and Sweden have had faster growth in public financial support than Germany, although this has mainly been in infrastructure renewal and enhancement, and there has been debate as to the adequacy of current infrastructure spending in Germany. On most measures, Britain has lower absolute levels of financial support than Germany as well as faster traffic growth. Sweden clearly has much higher financial support, although this may be the result of low population density. Thus on balance it is not clear that the reform process has worked better in the other countries than in Germany, despite initial expectations. Further in depth research on the reasons for these changes in financial support and traffic levels would be needed to reach a more conclusive answer. |
| Keywords: | Deregulation; market opening; vertical separation; railway competition |
| JEL: | D02 H54 |
| Date: | 2011–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2011_019&r=reg |
| By: | Rüdiger Pethig |
| Abstract: | A small open economy operates a carbon emission trading scheme and subsidizes green energy. Taking cap-and-trade as given, we seek to explain the subsidy as the outcome of a trilateral tug of war between the ‘green’ energy industry, the ‘black’ energy industry and consumers. With parametric functions we fully solve the competitive economic equilibrium and the lobbying Nash equilibrium. We show how the resultant subsidy depends on the political influence of all three lobbying groups and we trace its determinants. Whether consumers have ‘green preferences’ turns out to be crucial for the results. |
| Keywords: | green preferences, fossil fuel, green energy, green energy subsidy,cap-and-trade, overlapping regulation, competitive lobbying |
| JEL: | Q42 Q43 Q52 Q54 D72 D78 H23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:sie:siegen:150-11&r=reg |
| By: | Skurray, James H.; Pandit, Ram; Pannell, David J. |
| Abstract: | The development of a market in groundwater usage rights can be inhibited by constraints arising from the institutional context. Such impediments may reduce the potential gains from trade and may generate high transaction costs for prospective traders. We analyse the regulations and policies influencing groundwater trading in a case-study area â the Gnangara groundwater system around Perth, Western Australia â and identify significant impediments to a groundwater market. Property rights are found to be conditional, temporary, and vulnerable to amendment. Regulatory approval is required for all trades. Facilitating infrastructure is lacking, and price information is unavailable. The limitation of transfers to within management area boundaries that reflect land ownership and use rather than hydrological realities eliminates much of the potential for gains from trade. Over-allocation and weak monitoring also impede the development of a market. The current management system is likely to obscure any unmet demand for water-rights transfers between users and usage-types. While we apply the analysis to an example location, the analytical approach is broadly transferable. |
| Keywords: | Agricultural and Food Policy, Environmental Economics and Policy, Institutional and Behavioral Economics, Land Economics/Use, Political Economy, Public Economics, Resource /Energy Economics and Policy, Q15, Q25, Q28, Q38, Q56, Q57, Q58, R14, R52, H41, H23, H11, |
| Date: | 2011–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:ags:uwauwp:117825&r=reg |
| By: | Boone, Jan; Schottmüller, Christoph |
| Abstract: | This paper analyzes optimal procurement mechanisms in a setting where the procurement agency has incomplete information concerning the firms' cost functions and cares about quality as well as price. Low type firms are cheaper than high type firms in providing low quality but more expensive when providing high quality. Hence, each type is specialized in a certain quality level. We show that this specialization leads to a bunching of types on profits, i.e. a range of firms with different cost functions receives zero profits and therefore no informational rents. If first best welfare is monotone in the efficiency parameter, the optimal mechanism can be implemented by a simple auction. If first best welfare is U-shaped in type, the optimal mechanism is not efficient in the sense that types providing a lower second best welfare win against types providing a higher second best welfare. |
| Keywords: | deregulation; procurement; specialization |
| JEL: | H75 L51 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8704&r=reg |
| By: | Ma, Chunbo; Zhao, Xiaoli; Ma, Qian; Zhao, Yue |
| Abstract: | In the past three decades, Chinese electricity industry has experienced a series of regulatory reforms serving different purposes at different stages. In 2002, the former vertically integrated electricity utility - the State Power Corporation (SPC) â was divested and the generation sector was separated from the transmission and distribution networks in an effort to improve production efficiency. In this paper we study the impact of the reform on efficiency of fossil-fired power plants using plant-level data during 2000-2008. Our results from the data envelopment analysis (DEA) and panel regressions show that: 1) the total factor productivity (TFP) growth mainly comes from technological change; 2) the technical efficiency of previously SPC-managed power plants is converging to that of better-performing independent power producers (IPPs); 3) capacity utilization and unit size are significant factors affecting changes in technical efficiency and the pattern of converging technical efficiency between the two kinds of power plants; 4) most plants operate at increasing returns to scale indicating further cost savings could be achieved through increasing output. |
| Keywords: | Efficiency, DEA, Malmquist Index, China, Electricity, Industrial Organization, Productivity Analysis, Resource /Energy Economics and Policy, D24, L11, L51, L94, L98, |
| Date: | 2011–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:uwauwp:117811&r=reg |