Learning by Lending, Competition, and Screening Incentives in the Banking Industry

This paper shows that banks may have an incentive to reduce screening when the proportion of untested borrowers on the market increases, leading to a deterioration of their portfolios and a contraction of their profits. The paper addresses the issue in the context of a simple model where banks compete solely on screening and in a more complex model where banks compete by offering borrowers a menu of contracts. The results have policy implications with regard to financial liberalization, lending booms, and banking crises, as those occurred at different times in many emerging markets.

Why is 100% Reserve Banking Inefficient?

Financial crises are an important concern today. One part of the problem is banking crises, at the root of which is the bank run problem. One solution is 100% reserve banking. But this is inefficient. The reasons are, however, not obvious. The literature on bank runs following Diamond and Dybvig (1983) is based on banks? role in consumption smoothing. However, the earlier (rich) literature is based on banks? role in issuing deposits, which are a component of money and are a source of credit. In this context, a high reserve ratio for commercial banks obviously decreases commercial bank credit. However, in general, it does not decrease total credit. Despite this, 100% reserve banking is inefficient if competitive banks have a comparative advantage over the central bank in providing credit. The paper ends by examining the implications of a decrease in gold reserves held by the central banks.

Repensar la política macroeconómica

La gran moderación adormeció a los macroeconomistas y a los diseñadores de política con la creencia de que sabían cómo orientar la política macroeconómica. La crisis obliga claramente a cuestionar esa valoración. El artículo revisa los principales elementos del consenso anterior a la crisis, identificando dónde se estaba equivocados y qué principios del marco anterior a la crisis aún se mantienen; también, se da un primer paso para esbozar un nuevo marco de política macroeconómica

Country Insurance

The recent wave of financial crises has fueled the debate on the effect of IFIs intervention on governments' incentives to undertake reforms. In this paper we treat this intervention more generally as a country insurance contract, and examine its implications in a stylized set-up. More precisely, we identify the conditions under which the positive insurance effect dominates moral hazard considerations, and the channels through which this is achieved. In particular, we find that the case for country insurance is stronger for crisis-prone volatile economies, especially so if assistance is made contingent on the occurrence of adverse external macroeconomic shocks. Overall, our findings argue in favor of fairly-priced country insurance or insurance-type standing credit facilities that can be factored in ex ante by the borrowing government, as opposed to the customized discretionary bailoutsFinancial Crises, Bailouts, Moral Hazard, Insurance Effect,

Banking and currency crisis and systemic risk: lessons from recent events

Banking and currency crises have done severe economic damage in many countries in recent years. This article examines the causes and characteristics of these crises and the public policies intended to prevent them or mitigate their adverse consequences.Financial crises ; Bank failures ; Money ; Public policy

Bank Supervision Going Global? A Cost-Benefit Analysis (Replaced by CentER DP 2012-059)

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.Bank regulation;bank resolution;cross-border banking