Latest documents http://publikationen.ub.uni-frankfurt.de/index/index/ Thu, 18 Apr 2013 08:58:50 +0200 Thu, 18 Apr 2013 08:58:50 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29380 This paper presents a theory that explains why it is beneficial for banks to engage in circular lending activities on the interbank market. Using a simple network structure, it shows that if there is a non-zero bailout probability, banks can significantly increase the expected repayment of uninsured creditors by entering into cyclical liabilities on the interbank market before investing in loan portfolios. Therefore, banks are better able to attract funds from uninsured creditors. Our results show that implicit government guarantees incentivize banks to have large interbank exposures, to be highly interconnected, and to invest in highly correlated, risky portfolios. This can serve as an explanation for the observed high interconnectedness between banks and their investment behavior in the run-up to the subprime mortgage crisis. Tim Eisert; Christian Eufinger workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29380 Thu, 18 Apr 2013 08:58:50 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29379 This paper proposes a new regulatory approach that implements capital requirements contingent on managerial compensation. We argue that excessive risk taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea of the proposed regulation is to utilize the compensation scheme to drive a wedge between the interests of top management and shareholders to counteract shareholder risk-shifting incentives. The decisive advantage of this approach compared to existing regulation is that the regulator does not need to be able to properly measure the bank investment risk, which has been shown to be a difficult task during the 2008-2009 financial crisis. Christian Eufinger; Andrej Gill workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29379 Thu, 18 Apr 2013 08:49:05 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26867 This paper outlines relatively easy to implement reforms for the supervision of transnational banking-groups in the E.U. that should not be primarily based on legal form but on the actual risk structures of the pertinent financial institutions. The proposal also aims at paying close attention to the economics of public administration and international relations in allocating competences among national and supranational supervisory bodies. Before detailing the own proposition, this paper looks into the relationship between sovereign debt and banking crises that drive regulatory reactions to the financial turmoil in the Euro area. These initiatives inter alia affirm effective prudential supervision as a pivotal element of crisis prevention. In order to arrive at a more informed idea, which determinants apart from a perceived appetite for regulatory arbitrage drive banks’ organizational choices, this paper scrutinizes the merits of either a branch or subsidiary structure for the cross-border business of financial institutions. In doing so, it also considers the policy-makers perspective. The analysis shows that no one size fits all organizational structure is available and concludes that banks’ choices should generally not be second-guessed, particularly because they are subject to (some) market discipline. The analysis proceeds with describing and evaluating how competences in prudential supervision are currently allocated among national and supranational supervisory authorities. In order to assess the findings the appraisal adopts insights form the economics of public administration and international relations. It argues that the supervisory architecture has to be more aligned with bureaucrats’ incentives and that inefficient requirements to cooperate and share information should be reduced. Contrary to a widespread perception, shifting responsibility to a supranational authority cannot solve all the problems identified. Resting on these foundations, the last part of this paper finally sketches an alternative solution that dwells on far-reaching mutual recognition of national supervisory regimes and allocates competences in line with supervisors’ incentives and the risk inherent in crossborder banking groups. Tobias Tröger workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26867 Wed, 07 Nov 2012 16:10:00 +0100