Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive

We examine the pervasive view that “equity is expensive,” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. Any desirable public subsidies to banks’ activities should be given directly and not in ways that encourage leverage. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support. We conclude that bank equity is not socially expensive, and that high leverage is not necessary for banks to perform all their socially valuable functions, including lending, taking deposits and issuing money-like securities. To the contrary, better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal, and, viewed from an ex ante perspective, high leverage may not even be privately optimal for banks. Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy.capital regulation, financial institutions, capital structure, too big to fail, systemic risk, bank equity, contingent capital, Basel.

Precautionary Recapitalisations: Time for a Review

The first part of the paper considers the effects of pre-empting a resolution procedure for a troubled financial institution by a precautionary recapitalization as specified in Article 32 (4) (d) of the Bank Recovery and Resolution Directive (BRRD). Benefits are seen for the maintenance of systemically important operations of an institution with legally independent subsidiaries in multiple jurisdictions and possibly for the maintenance of lending in situations where an entire banking system is involved. Other systemic concerns, such as the maintenance of lending when only part of a banking system is affected, the avoidance of damage to money markets, and potential systemic effects from bailing in creditors, can be addressed in a resolution procedure under the rules of the BRRD and do not require the instrument of a precautionary recapitalization. The second part of the paper provides a critical assessment of Article 32 (4) (d) of the BRRD and finds some weaknesses that contribute to raising taxpayers’ costs or to reducing the effectiveness of the operation. The availability of precautionary recapitalization outside of resolution contributes to undue and costly delays in acknowledging and addressing problems. The conditions specified in the Directive are problematic, sometimes too tough, sometimes too lenient, most importantly because the objectives of State aid control differ from the objectives of the BRRD. The paper concludes with suggestions for reform

An Economic Approach to Article 82

This report argues in favour of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. In particular, we support an effects-based rather than a form-based approach to competition policy. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts

An Economic Approach to Article 82

This report argues in favour of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. In particular, we support an effects-based rather than a form-based approach to competition policy. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts.competition policy; abuse of market power

Optimal income taxation, public-goods provision and public-sector pricing : a contribution to the foundations of public economics

The paper develops an integrated model of optimal nonlinear income taxation, public-goods provision and pricing in a large economy. With asymmetric information about labour productivities and publicgoods preferences, the multidimensional mechanism design problem becomes tractable by requiring renegotiation proofness of the final allocation of private goods and admission tickets for excludable public goods. Under an affiliation assumption on the underlying distribution, optimal income taxation, public-goods provision and admission fees have the same qualitative properties as in unidimensional models. These properties are obtained for utilitarian welfare maximization and for a Ramsey-Boiteux formulation with interim participation constraints

Lipid Signaling via Pkh1/2 Regulates Fungal CO 2 Sensing through the Kinase Sch9.

Adaptation to alternating CO2 concentrations is crucial for all organisms. Carbonic anhydrases—metalloenzymes that have been found in all domains of life—enable fixation of scarce CO2 by accelerating its conversion to bicarbonate and ensure maintenance of cellular metabolism. In fungi and other eukaryotes, the carbonic anhydrase Nce103 has been shown to be essential for growth in air (~0.04% CO2). Expression of NCE103 is regulated in response to CO2 availability. In Saccharomyces cerevisiae, NCE103 is activated by the transcription factor ScCst6, and in Candida albicans and Candida glabrata, it is activated by its homologues CaRca1 and CgRca1, respectively. To identify the kinase controlling Cst6/Rca1, we screened an S. cerevisiae kinase/phosphatase mutant library for the ability to regulate NCE103 in a CO2-dependent manner. We identified ScSch9 as a potential ScCst6-specific kinase, as the sch9? mutant strain showed deregulated NCE103 expression on the RNA and protein levels. Immunoprecipitation revealed the binding capabilities of both proteins, and detection of ScCst6 phosphorylation by ScSch9 in vitro confirmed Sch9 as the Cst6 kinase. We could show that CO2-dependent activation of Sch9, which is part of a kinase cascade, is mediated by lipid/Pkh1/2 signaling but not TORC1. Finally, we tested conservation of the identified regulatory cascade in the pathogenic yeast species C. albicans and C. glabrata. Deletion of SCH9 homologues of both species impaired CO2-dependent regulation of NCE103 expression, which indicates a conservation of the CO2 adaptation mechanism among yeasts. Thus, Sch9 is a Cst6/Rca1 kinase that links CO2 adaptation to lipid signaling via Pkh1/2 in fungi

Sensitivity of the IceCube Detector to Astrophysical Sources of High Energy Muon Neutrinos

We present the results of a Monte-Carlo study of the sensitivity of the planned IceCube detector to predicted fluxes of muon neutrinos at TeV to PeV energies. A complete simulation of the detector and data analysis is used to study the detector's capability to search for muon neutrinos from sources such as active galaxies and gamma-ray bursts. We study the effective area and the angular resolution of the detector as a function of muon energy and angle of incidence. We present detailed calculations of the sensitivity of the detector to both diffuse and pointlike neutrino emissions, including an assessment of the sensitivity to neutrinos detected in coincidence with gamma-ray burst observations. After three years of datataking, IceCube will have been able to detect a point source flux of E^2*dN/dE = 7*10^-9 cm^-2s^-1GeV at a 5-sigma significance, or, in the absence of a signal, place a 90% c.l. limit at a level E^2*dN/dE = 2*10^-9 cm^-2s^-1GeV. A diffuse E-2 flux would be detectable at a minimum strength of E^2*dN/dE = 1*10^-8 cm^-2s^-1sr^-1GeV. A gamma-ray burst model following the formulation of Waxman and Bahcall would result in a 5-sigma effect after the observation of 200 bursts in coincidence with satellite observations of the gamma-rays.Comment: 33 pages, 13 figures, 6 table