The future of securitization

Securitization is a financial innovation that experiences a boom-bust cycle, as many other innovations before. This paper analyzes possible reasons for the breakdown of primary and secondary securitization markets, and argues that misaligned incentives along the value chain are the primary cause of the problems. The illiquidity of asset and interbank markets, in this view, is a market failure derived from ill-designed mechanisms of coordinating financial intermediaries and investors. Thus, illiquidity is closely related to the design of the financial chains. Our policy conclusions emphasize crisis prevention rather than crisis management, and the objective is to restore a “comprehensive incentive alignment”. The toe-hold for strengthening regulation is surprisingly small. First, we emphasize the importance of equity piece retention for the long-term quality of the underlying asset pool. As a consequence, equity piece allocation needs to be publicly known, alleviating market pricing. Second, on a micro level, accountability of managers can be improved by compensation packages aiming at long term incentives, and penalizing policies with destabilizing effects on financial markets. Third, on a macro level, increased transparency relating to effective risk transfer, risk-related management compensation, and credible measurement of rating performance stabilizes the valuation of financial assets and, hence, improves the solvency of financial intermediaries. Fourth, financial intermediaries, whose risk is opaque, may be subjected to higher capital requirements

Boosting insights in insurance tariff plans with tree-based machine learning methods

Pricing actuaries typically operate within the framework of generalized linear models (GLMs). With the upswing of data analytics, our study puts focus on machine learning methods to develop full tariff plans built from both the frequency and severity of claims. We adapt the loss functions used in the algorithms such that the specific characteristics of insurance data are carefully incorporated: highly unbalanced count data with excess zeros and varying exposure on the frequency side combined with scarce, but potentially long-tailed data on the severity side. A key requirement is the need for transparent and interpretable pricing models which are easily explainable to all stakeholders. We therefore focus on machine learning with decision trees: starting from simple regression trees, we work towards more advanced ensembles such as random forests and boosted trees. We show how to choose the optimal tuning parameters for these models in an elaborate cross-validation scheme, we present visualization tools to obtain insights from the resulting models and the economic value of these new modeling approaches is evaluated. Boosted trees outperform the classical GLMs, allowing the insurer to form profitable portfolios and to guard against potential adverse risk selection

Special insurance systems for motor vehicle liability

Automobile insurance is a compulsory purchase for most drivers in Europe and the United States. Obviously, this obligation raises concerns about affordability and availability. To mitigate such problems, in most legal systems special facilities have been created, either by policymakers or by insurance companies, to deal with risks that are very difficult to insure or are even considered uninsurable on the commercial market. We (1) provide an overview of special schemes in several European countries, (2) examine the potential advantages of reducing the number of uninsured drivers and investigate the influence of the special schemes on the decision of individuals to drive (un)insured, (3) examine the consequences of these schemes for the incentives of drivers and (4) discuss the social costs of the special schemes

New financial order : recommendations by the Issing Committee ; preparing G-20 – Washington, November 15, 2008

Content New Financial Architecture (Short Version) 1. Purpose of the paper – causes of the crisis 2. Recommendations 2.1. Incentives 2.2. Transparency 2.3. Regulation and Supervision 2.4. International Institutions 3. Concluding remarks Appendix (Full text) A 1. Causes of the crisis A 2. Improving the Framework A 2.1. Incentives A 2.2. Transparency A 2.3. Regulation and Supervision A 2.4. International Institutions A 3. Concluding remark

Contracting out public transit operation services: an incentive performance-based approach

The literature on public transit services contracting, emphasizes the need of efficient contracting designs to promote parties’ interest alignment. There is, however, limited research addressing specific incentive mechanisms. The paper contributes to that literature by developing a performance-based model with an embedded incentive bonus/malus (B/M) mechanism for contracting out transit services. Monte Carlo simulation documents that model’s performance appears sensitive to stochastic specification of some of the B/M drivers, and responsive to changes in the contractual performance factors out of the sub-concessionaire’s control. Evidence on the operation of a light-rail transit system designed based on a version of the model, document that it may contribute to promote ridership patronage, increase the average ride, and ultimately promote the economic operating efficiency of the system. Some policy implications are drawn, namely in terms of public funds allocative efficiency, and promotion of social welfare in contracting transit services.info:eu-repo/semantics/publishedVersio

Contracting out public transit services: a competitive performance-based approach

This paper develops a bonus / malus incentive model to contracting out public transit services, and provides evidence on performance measures of a lightrail transit system operation, procured with a contract designed based on our modeling approach. Empirical results document that the implementation of a performance-based contract with an embedded incentive bonus / malus mechanism, may contribute to promote ridership patronage, increase the average ride, and ultimately significantly improving the overall economic operating efficiency of the system, measured by a 40 percent increase in the operating costs coverage ratio during the contract term

Optimal pay regulation for too-big-to-fail banks

This paper considers optimal executive pay regulations for banks that are too big-to-fail. Theoretically, we map the consequences of a series of commonly-used pay schemes, describing their relative optimality and ultimate societal consequences. We argue that in a world of too-big-to-fail policy, simple equity-linked remuneration schemes maximise shareholder value by incentivising executives to choose excessively risky projects at the expense of the taxpayer. We find that paying the executive partly in debt fails to mitigate the project choice distortion when debt markets are informed. By contrast, both clawback rules and linking pay to interest rates can incentivise the executive to make socially optimal risk choices, but only if they are accompanied by appropriate restrictions on the curvature of pay with respect to the bank's market value. Pay curvature can be generated by tools such as equity options and promotion policy. The policy implication is that unless regulators can enforce restrictions on pay curvature, bank shareholders can undermine the effectiveness of these pay regulations

The mountain environment, a driver for adaptation to climate change

International audienceThe mountain environment is perceived today by vine-growers as a strong structural constraint. Yet in the current context of climate change, in which we turn to genetics, irrigation or innovation in cultural practices to maintain production quality, could the mountain environment emerge as a solution for adapting to climate change in vine-growing? Here we explore the role of cooperative policies that may be deployed on the territorial scale, using an agent-based model. Our model was based on the viticulture of the Banyuls-Collioures AOC area, which is characterized by small-scale vine-growers and marked by widespread involvement in cooperative systems. The simulation results showed an important role of cooperative policies not only to conserve narrow production window and required vine quality, but also in respect of the emblematic landscape structure. These results should foster vine-growers to strengthen their cooperatives and adequately use these organizations to mitigate future climate change impacts