Adequacy of capital requirements for securitizations : financial engineering of regulatory approaches, cyclicality, systematic risk and rating standards

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Lender exposure and effort in the syndicated loan market

This paper tests for agency problems between the lead arranger and syndicate participants in the syndicated loan market. One problem comes from adverse selection, whereby the lead arranger has a private informational advantage over participants. A second problem comes from moral hazard, whereby the lead arranger puts less effort in monitoring when it retains a smaller loan portion. Applying an instrumental variables strategy, I find that borrowers' performance is influenced by the lead's share. Dynamic tests extract active contributions made by the lead, supporting a monitoring interpretation. Loan covenants serve as a mechanism to induce the lead arranger to monitor.

Essays in Development Economics and Economics of the Family

Chapter 1 explores a potential solution to the continuing disequlibrium in microfinance markets. I design a mechanism to aid in securitization of microloans, using a dynamic investment pool governed by a Central Microcredit Clearinghouse (CMC), that would sell investment units back to MFIs and outside investors simultaneously. The CMC would serve as a catalyst to this other avenue of microcredit financing, securitization of microloans, which could help spawn the type of growth in investor-based funding of MFIs that is so urgently needed. Chapter 2 analyzes Official Development Assistance (ODA) commitment and disbursement activity in terms of motivation, considering that the difference between bilateral aid commitments and disbursements may be related to the business cycle of the donor country. The annual disbursement gap is calculated for each pair for each year, as well as a cumulative disbursement gap, and these are regressed against multiple cyclicality measures of income and a set of control variables. It is found in multiple specifications that the cumulative disbursement gap is generally procyclical, much as aid itself, although the cyclicality of aid depends on the cyclicality measure. This is confirmed with four extensions designed mainly as robustness checks. Chapter 3 uses both the round six and 2006-2008 National Survey of Family Growth (NSFG) data for both male and female respondents along with macroeconomic data over the same time period to test a number of theoretical questions regarding changes in relationship exit costs and their effects on behavior in cohabitation, marriage, and separation. I find that our proxy for cohabitation surplus and exit costs significantly affects subsequent decisions of cohabitation, marriage, separation, and divorce. Also, marriage hazard rates are related to these changing exit costs in ways consistent with recent advances in theory

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

Public credit registries as a tool for bank regulation and supervision

This paper is about the importance of the information in Public Credit Registries (PCRs) for supporting and improving banking sector regulation and supervision, particularly in the light of the new approach embodied in Basel III. Against the backdrop of the financial crisis and the existence of information data gaps, the importance of complete, accurate and timely credit information in the financial system is evident. Both in normal times and during crises, authorities need a device that allows them to look at the universe of credits in a detailed and readily way. And more importantly, they need to develop tools that exploit as much as possible the information therein contained. PCR databases contain individual credit information on borrowers and their credits which makes it possible to implement advanced techniques that measure banks'credit risk exposure. It allows optimizing the prudential regulation ensuring that provisioning and capital requirements are properly calibrated to cover expected and unexpected losses respectively. It also permits validating banks'internal rating systems, performing stress tests and informing macroprudential surveillance. In this respect, it is envisioned that the existence of a PCR will be a key factor to enhance the supervision and regulation of the financial system. Furthermore, the extent, accuracy and availability of the information collected by the authorities will determine the usefulness of the PCR as part of their toolkit to monitor the potential vulnerabilities not only on a microprudential level, but also on a macroprudential one.Banks&Banking Reform,Access to Finance,Financial Intermediation,Debt Markets,Bankruptcy and Resolution of Financial Distress

Is the Basel III Leverage Ratio countercyclical? A study for Portuguese banks

This work analyses how the leverage ratio behaves through the cycle, vis-à-vis other capital ratios. For a sample of the largest Portuguese banks, the Basel III leverage ratio is indeed countercyclical. This result is relevant from a regulatory perspective, since the introduction of a limit on the leverage ratio will function as a restriction in the banks’ balance sheet size, reducing the economic costs associated with the excessive growth of leverage in periods of economic expansion followed by aggressive deleveraging in the downturn. However, one cannot exclude that restrictions on banks’ leverage incentivize its transference to less regulated intermediaries

THE BASEL COMMITTEE´S PROPOSALS FOR REVISED CAPITAL STANDARDS: MARK 2 AND THE STATE OF PLAY

The Basel Committee´s Proposals for Revised Capital Standards: Mark 2 and the State of Play. The new 500-page consultative document on capital standards of the Basel Committee on Banking Supervision (BCBS), “The New Basel Capital Accord”, gives what is likely to prove a reasonable idea of the eventual shape of the new capital accord. However, many detailed issues remain to be resolved before completion of the drafting process in 2002. The scale and duration of this process reflects both the increasing complexity of banking operations and the role of the BCBS as the institution responsible for globally applicable standards for banking regulation and supervision. The basic structure of the 2001 consultative document follows that of the June 1999 proposals, in particular three Pillars treating the calculation of capital requirements, supervisory review, and the disclosure necessary for effective market discipline. But the 2001 proposals are much more concrete and detailed. In their present form the proposals of the New Accord raise several concerns likely to apply to all countries but in some respects particularly to developing ones. One set of concerns relates to the New Accord’s impact on supervisory divergences among countries, cross-border competition between banks, and cooperation between national supervisors. The New Accord has been crafted to accommodate banks of very different levels of sophistication. Yet this may compromise its basic objective of enhancing competitive equality by actually creating regulatory divergences in some areas of banking practice both within and between different countries. As a result the difficulties of achieving effective cross-border cooperation amongst supervisors may well increase. A second set of concerns involves the relation of the New Accord to ongoing exercises involving codes and standards. Here the key standard is the BCBS’s Core Principles for Effective Banking Supervision for which the capital adequacy requirements of the Basle Capital Accord provide the principal benchmark. The New Accord will represent a quantum increase in the complexity of supervisors’ responsibilities in most countries, and the resulting administrative burden will be aggravated by its in corporation in assessment exercises regarding compliance with the key standards. Furthermore, the link between the New Accord and key standards for financial systems also implies that implementation will become a subject for IMF Article IV surveillance and part of the conditionality associated with the IMF’s new CCL facility. A further set of issues involves possible effects on regulatory arbitrage, since the comprehensiveness and detailed character of the rules of the New Accord will almost inevitably be a source of new opportunities for such arbitrage. Finally, there are concerns as to the effects of the New Accord on economic activity and international capital flows. The proposed risk weights of the IRB approach would lead to substantial rises in interest rates for lending to borrowers with low credit ratings both within countries and internationally – rises likely to affect borrowers from several developing countries. Moreover, owing to their links to the ratings of credit rating agencies and to observed default rates, the risk weights proposed in the New Accord are capable of contributing to the pro-cyclical character of bank lending both within countries and across borders, since they would be likely to translate higher credit risks in more difficult times into increased capital requirements (and thus more restrictive lending policies). Prudential rules which would minimize such dangers can be sketched but would nonetheless be difficult to incorporate in the design of regulatory systems.

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