Sustainable Architecture for Finance in Europe (SAFE)
Refine
Year of publication
- 2014 (74) (remove)
Document Type
- Working Paper (74) (remove)
Language
- English (74) (remove)
Has Fulltext
- yes (74)
Is part of the Bibliography
- no (74)
Keywords
- Labor income risk (3)
- Portfolio choice (3)
- monetary policy (3)
- Asset Pricing (2)
- Asset Quality Review (2)
- Basel regulation (2)
- Business Cycle (2)
- Compensation Structure (2)
- Credit Spread (2)
- European Central Bank (2)
- General Equilibrium (2)
- Greece (2)
- Health shocks (2)
- Household Finance (2)
- Inside Debt (2)
- Marktdisziplin (2)
- Recursive Preferences (2)
- Risk-Taking (2)
- Stochastic mortality risk (2)
- Systemic risk (2)
- Transparenz (2)
- austerity (2)
- capital regulation (2)
- confidence (2)
- credit supply (2)
- financial crisis (2)
- financial literacy (2)
- growth (2)
- household finance (2)
- incomplete markets (2)
- internal ratings (2)
- investment (2)
- market discipline (2)
- prudential supervision (2)
- public debt (2)
- regulation (2)
- regulatory arbitrage (2)
- risk-taking (2)
- shadow banking (2)
- stockholding (2)
- transparency (2)
- Asset Allocation (1)
- Austerity Measures (1)
- Bail-in (1)
- Bank Capital (1)
- Bank Recovery and Resolution Directive (BRRD) (1)
- Banking Stability (1)
- Behavioral finance (1)
- Bitcoin (1)
- CDS (1)
- Choquet expected utility (1)
- Comprehensive Assessment (1)
- Contagion (1)
- Corporate Governance (1)
- Corporate Groups (1)
- Creditor Protection (1)
- Cultural Influences on Economic Behavior (1)
- Cumulative prospect theory (1)
- Decision under risk (1)
- Delaunay Interpolation (1)
- Dodd-Frank Act (1)
- Dynamic Models (1)
- Dynamic Networks (1)
- Dynamic inconsistency (1)
- E.U. Corporate Law (1)
- EU economic and financial services legislation (1)
- Efficiency Wages (1)
- Endogenous Growth (1)
- Endogenous gridpoints Method (1)
- Equity options (1)
- Europe (1)
- European Banking Authority (1)
- European Banking Authority, Single Supervisory Mechanism (1)
- European Banking Union (1)
- European Central Bankor (1)
- European Systemic Risk Board (1)
- European debt crisis (1)
- FBSDE (1)
- Feedback (1)
- Financial Distress (1)
- Fiscal Compact (1)
- Fiscal Policy (1)
- Framing e↵ects (1)
- GFSY (1)
- German reunification (1)
- Group Interesterest (1)
- Hawkes processes (1)
- Health expenses (1)
- Health jumps (1)
- Household Portfolios (1)
- Household Wealth (1)
- Implied volatility (1)
- Impulse-response (1)
- Insurance (1)
- Insurer Default Risk (1)
- Interbank Markets (1)
- Interest Rate Guarantees (1)
- Jumps (1)
- Lebensversicherungen verlangen (1)
- Life Insurers (1)
- Life-cycle hypothesis (1)
- Liquidity Coinsurance (1)
- Long-run Risk (1)
- Minority Shareholder Protection (1)
- Monetary Union (1)
- Moral Hazar (1)
- Mortality risk (1)
- Multitasking (1)
- Mutually Exciting Processes (1)
- Mutually exciting processes (1)
- Numerical Solution (1)
- On-the-Job Search (1)
- Outright Monetary Transactions (1)
- R&D (1)
- Regulation Capital Requirements (1)
- Related Party Transactions (1)
- Repeated Principal-Agent Model (1)
- Risikobereitschaft (1)
- Risk Assessment (1)
- Rubin Causal Model (1)
- Saving puzzles (1)
- Self-Control (1)
- Shareholder Rights Directive (1)
- Short-run Risk (1)
- Single Resolution Mechanism (SRM) (1)
- Single Supervisory Mechanism (1)
- Single Supervisy Mechanism (1)
- Solvency (1)
- Solvency II (1)
- Sovereign risk (1)
- Stress Test (1)
- Tail Risk (1)
- Term life insurance (1)
- Tunneling (1)
- UK (1)
- USA (1)
- Value-at-risk (1)
- aggregate risk (1)
- aging (1)
- allocation bias (1)
- ambiguity (1)
- asset markets (1)
- asset pricing (1)
- average treatment effect (1)
- bail-in (1)
- balance sheet adjustment (1)
- bank resolution regimes (1)
- bank runs (1)
- banking (1)
- banking separation proposals (1)
- booms (1)
- bounded rationality (1)
- capacity utilization (1)
- capture (1)
- central bank communication (1)
- collective action (1)
- competition (1)
- consumer credit (1)
- consumer education (1)
- consumption expenditure (1)
- consumption hump (1)
- consumption smoothing (1)
- consumption-portfolio choice (1)
- coordination (1)
- counterfactual analysis (1)
- counterfactual decompositions (1)
- credit rationing (1)
- crowding out (1)
- debt consolidation (1)
- debt restructuring (1)
- default (1)
- deleveraging (1)
- economic reforms (1)
- education (1)
- exit strategies (1)
- experimental economics (1)
- familiarity (1)
- financial innovation (1)
- financial regulation (1)
- financial transaction tax (1)
- fiscal adjustment (1)
- fiscal austerity (1)
- fiscal crisis (1)
- fiscal decentralization (1)
- fiscal multipliers (1)
- fiscal policy (1)
- fiscal stress (1)
- fixed point approach (1)
- floating net asset value (FNAV) (1)
- foreign direct investment (1)
- forward guidance (1)
- government debt (1)
- heterogeneous agents (1)
- household debt (1)
- household liquidity (1)
- household savings (1)
- households (1)
- housing (1)
- identification (1)
- idiosyncratic risk (1)
- incentives (1)
- incentives for investment (1)
- incomplete information (1)
- innovation (1)
- insurance (1)
- inverse probability weighting (1)
- investment decisions (1)
- laboratory experiments (1)
- leisure (1)
- life insurance demand (1)
- life-cycle models (1)
- liquid assets (1)
- liquidity premium (1)
- liquidity runs (1)
- loan officer (1)
- loan origination (1)
- local projection (1)
- local projections (1)
- macroprudential supervision (1)
- market fragmentation (1)
- market quality (1)
- matching (1)
- microprudential supervision (1)
- money (1)
- money market funds (1)
- monitoring (1)
- mortgages (1)
- multinational firms (1)
- nachrangiges Fremdkapital (1)
- output fluctuations (1)
- panel VAR (1)
- panel data (1)
- peer effects (1)
- peer to peer payment systems (1)
- pooling equilibrium (1)
- portfolio choice (1)
- pricing (1)
- private business (1)
- propensity score (1)
- proprietary trading ban (1)
- public-private relations (1)
- recession (1)
- regression adjustment (1)
- risk premia (1)
- screening (1)
- separating equilibrium (1)
- slumps (1)
- social impact bonds (1)
- social interactions (1)
- social relations (1)
- social security (1)
- sovereign risk (1)
- speculative trading (1)
- spillover effects (1)
- statistical risk measurement (1)
- statistics (1)
- stochastic differential utility (1)
- systemic risk (1)
- systemic risk analysis (1)
- tax competition (1)
- taxation (1)
- too big to fail (1)
- total loss absorbing capacity (TLAC) (1)
- transactions (1)
- valuation discount (1)
- vertical fiscal imbalances (1)
- wage hump (1)
- welfare (1)
- yield spreads (1)
- fiscal multipliers (1)
- fiscal policy (1)
This paper provides a systematic analysis of individual attitudes towards ambiguity, based on laboratory experiments. The design of the analysis allows to capture individual behavior across various levels of ambiguity, ranging from low to high. Attitudes towards risk and attitudes towards ambiguity are disentangled, providing pure measures of ambiguity aversion. Ambiguity aversion is captured in several ways, i.e. as a discount factor net of a risk premium, and as an estimated parameter in a generalized utility function. We find that ambiguity aversion varies across individuals, and with the level of ambiguity, being most prominent for intermediate levels. Around one third of subjects show no aversion, one third show maximum aversion, and one third show intermediate levels of ambiguity aversion, while there is almost no ambiguity seeking. While most theoretical work on ambiguity builds on maxmin expected utility, our results provide evidence that MEU does not adequately capture individual attitudes towards ambiguity for the majority of individuals. Instead, our results support models that allow for intermediate levels of ambiguity aversion. Moreover, we find risk aversion to be statistically unrelated to ambiguity aversion on average. Taken together, the results support the view that ambiguity is an important and distinct argument in decision making under uncertainty.
SAFE Professor Michalis Haliassos was a member of the National Council for Research and Technology (ESET) established by the Government of Greece for the period 2010-2013. The council, consisting of eleven scientists from a range of disciplines, has now published their communiqué "National Strategic Framework for Research and Innovation 2014 -2020".
To promote the advancement of research, technology and innovation in Greece, the strategic plan proposed by the authors seeks to identify areas of existing research strength and excellence that can be further advanced to become engines for progress and growth in Greece, as well as flaws inherent to the present system. The authors stress the need to address current constraints to growth, which include the declining education system; the confusion and weaknesses of R&D governance and management; the discontinuities and inefficiencies of resource allocation and investment; the lack of adaptation to clearly-defined national priorities; and the inadequate opportunities and funding for high-quality research and development to flourish. They stress the need for prioritisation and efficient allocation; stability of the policy frame; predictability of planning; provision of opportunity; recognition of excellence; and responsiveness to current and future needs.
On 23 July 2014, the U.S. Securities and Exchange Commission (SEC) passed the “Money Market Reform: Amendments to Form PF ,” designed to prevent investor runs on money market mutual funds such as those experienced in institutional prime funds following the bankruptcy of Lehman Brothers. The present article evaluates the reform choices in the U.S. and draws conclusions for the proposed EU regulation of money market funds.
This paper investigates extensions of the method of endogenous gridpoints (ENDGM) introduced by Carroll (2006) to higher dimensions with more than one continuous endogenous state variable. We compare three different categories of algorithms: (i) the conventional method with exogenous grids (EXOGM), (ii) the pure method of endogenous gridpoints (ENDGM) and (iii) a hybrid method (HYBGM). ENDGM comes along with Delaunay interpolation on irregular grids. Comparison of methods is done by evaluating speed and accuracy. We find that HYBGM and ENDGM both dominate EXOGM. In an infinite horizon model, ENDGM also always dominates HYBGM. In a finite horizon model, the choice between HYBGM and ENDGM depends on the number of gridpoints in each dimension. With less than 150 gridpoints in each dimension ENDGM is faster than HYBGM, and vice versa. For a standard choice of 25 to 50 gridpoints in each dimension, ENDGM is 1.4 to 1.7 times faster than HYBGM in the finite horizon version and 2.4 to 2.5 times faster in the infinite horizon version of the model.
Europe's debt crisis casts doubt on the effectiveness of fiscal austerity in highly-integrated economies. Closed-economy models overestimate its effectiveness, because they underestimate tax-base elasticities and ignore cross-country tax externalities. In contrast, we study tax responses to debt shocks in a two-country model with endogenous utilization that captures those externalities and matches the capital-tax-base elasticity. Quantitative results show that unilateral capital tax hikes cannot restore fiscal solvency in Europe, and have large negative (positive) effects at "home" ("abroad"). Restoring solvency via either Nash competition or Cooperation reduces (increases) capital (labor) taxes significantly, and leaves countries with larger debt shocks preferring autarky.
We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.
I analyze a critical illness insurance in a consumption-investment model over the life cycle. I solve a model with stochastic mortality risk and health shock risk numerically. These shocks are interpreted as critical illness and can negatively affect the expected remaining lifetime, the health expenses, and the income. In order to hedge the health expense effect of a shock, the agent has the possibility to contract a critical illness insurance. My results highlight that the critical illness insurance is strongly desired by the agents. With an insurance profit of 20%, nearly all agents contract the insurance in the working stage of the life cycle and more than 50% of the agents contract the insurance during retirement. With an insurance profit of 200%, still nearly all working agents contract the insurance, whereas there is little demand in the retirement stage.
I numerically solve realistically calibrated life cycle consumption-investment problems in continuous time featuring stochastic mortality risk driven by jumps, unspanned labor income as well as short-sale and liquidity constraints and a simple insurance. I compare models with deterministic and stochastic hazard rate of death to a model without mortality risk. Mortality risk has only minor effects on the optimal controls early in the life cycle but it becomes crucial in later years. A diffusive component in the hazard rate of death has no significant impact, whereas a jump component is desired by the agent and influences optimal controls and wealth evolution. The insurance is used to ensure optimal bequest such that there is no accidental bequest. In the absence of the insurance, the biggest part of bequest is accidental.
Robustness, validity, and significance of the ECB's asset quality review and stress test exercise
(2014)
As we are moving toward a eurozone banking union, the European Central Bank (ECB) is going to take over the regulatory oversight of 128 banks in November 2014. To that end, the ECB conducted a comprehensive assessment of these banks, which included an asset quality review (AQR) and a stress test. The fundamental question is how accurately will the financial condition of these banks have been assessed by the ECB when it commences its regulatory oversight? And, can the comprehensive assessment lead to a full repair of banks’ balance sheets so that the ECB takes over financially sound banks and is the necessary regulation in place to facilitate this? Overall, the evidence presented in this paper based on the design of the comprehensive assessment as well as own stress test exercises suggest that the ECB’s assessment might not comprehensively deal with the problems in the financial sector and risks may remain that will pose substantial threats to financial stability in the eurozone.
This paper contrasts the recent European initiatives on regulating corporate groups with alternative approaches to the phenomenon. In doing so it pays particular regard to the German codified law on corporate groups as the polar opposite to the piecemeal approach favored by E.U. legislation.
It finds that the European Commission’s proposal to submit (significant) related party transactions to enhanced transparency, outside fairness review, and ex ante shareholder approval is both flawed in its design and based on contestable assumptions on informed voting of institutional investors. In particular, the contemplated exemption for transactions with wholly owned subsidiaries allows controlling shareholders to circumvent the rule extensively. Moreover, vesting voting rights with (institutional) investors will not lead to the informed assessment that is hoped for, because these investors will rationally abstain from active monitoring and rely on proxy advisory firms instead whose competency to analyze non-routine significant related party transactions is questionable.
The paper further delineates that the proposed recognition of an overriding interest of the group requires strong counterbalances to adequately protect minority shareholders and creditors. Hence, if the Commission choses to go down this route it might end up with a comprehensive regulation that is akin to the unpopular Ninth Company Law Directive in spirit, though not in content. The latter prediction is corroborated by the pertinent parts of the proposal for a European Model Company Act.
How special are they? - Targeting systemic risk by regulating shadow banking : (October 5, 2014)
(2014)
This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.
How special are they? - Targeting systemic risk by regulating shadow banking : (October 5, 2014)
(2014)
This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.
The recent decline in euro area inflation has triggered new calls for additional monetary stimulus by the ECB in order to counter the threat of a self‐reinforcing deflation and recession spiral. This note reviews the available evidence on inflation expectations, output gaps and other factors driving current inflation through the lens of the Phillips curve. It also draws a comparison to the Japanese experience with deflation in the late 1990s and the evidence from Japan concerning the outputinflation nexus at low trend inflation. The note concludes from this evidence that the risk of a selfreinforcing deflation remains very small. Thus, the ECB best await the impact of the long‐term refinancing operations decided in June that have the potential to induce substantial monetary accommodation once implemented for the first time in September.
One of the motivations for establishing a European banking union was the desire to break the ties with between national regulators and domestic financial institutions in order to prevent regulatory capture. However, supervisory authority over the financial sector at the national level can also have valuable public benefits. The aim of this policy letter is to detail these public benefits in order to counter discussions that focus only on conflicts of interest. It is informed by an analysis of how financial institutions interacted with policy-makers in the design of national bank rescue schemes in response to the banking crisis of 2008. Using this information, it discusses the possible benefits of close cooperation between financial institutions and regulators and analyzes these in the wake of a European banking union.