Incentives to Issue Low-Quality Securitized Products in the OTD Business Model

We consider an economy in which a lender finances loans to borrowers by issuing a securitized product to investors and in which the credit quality of the product can depend on whether the lender screens borrowers. In the presence of asymmetric information between the lender and investors regarding the credit quality of potential borrowers, overvaluation from the lender's perspective can occur for low-quality securitized products, which inefficiently induces the lender not to screen borrowers and hence to issue the securitized products of low credit quality. This is likely to occur when the probability of being in a bad state (i.e., the presence of low-quality borrowers) is low, or when the seeds of recession begin emerging in a booming economy.Originate-to-distribute, Securitization, Asymmetric information, Screening, Verification

A Financial System Perspective on Japan's Experience in the Late 1980s

This paper revisits the events of the 1980s bubble in Japan in light of the lessons learned from the subprime crisis in the United States. Our focus is on the role played by sectoral developments in the financial system in Japan. We highlight the transformation of a subset of non-financial firms (the large manufacturing firms) from being net debtors to the banks to becoming net creditors to the banks, thereby becoming part of the financial intermediary sector. In this way, large manufacturing firms in Japan played the role of surrogate wholesale banks that increased the overall supply of credit to the economy. When good borrowers already had credit and yet loose monetary conditions encouraged greater credit supply, credit availability to marginal borrowers and to real estate-related sectors increased. We discuss the role of market conditions and monetary policy in this development.Balance sheet, Commitment, Credit supply, Financial liberalization, Financial system perspective, Japan, Subprime crisis

Detrimental Effects of Retention Regulation: Incentives for Loan Screening in Securitization under Asymmetric Information

We consider an economy in which a lender finances his loans to borrowers by issuing a securitized product to investors, and where the credit quality of the product may depend on whether the lender screens the borrowers. In the presence of asymmetric information between the lender and the investors about the credit quality of potential borrowers, overvaluation of the low-quality securitized product may occur, inducing lender to not screen the borrowers and hence to issue a securitized product of low credit quality. This is likely to occur when the investors finds it difficult to distinguish the good state from the bad state, or when the seed of recession creeps toward the booming economy. A retention regulation that requires the lender to hold a minimum ratio of his own securitized products is not necessarily effective in solving this incentive problem. Even worse, in a certain situation, the retention regulation discourages the lender's screening effort and reduces welfare.originate-to-distribute, securitization, asymmetric information, financial regulation, screening, verification, retention

The Challenges Confronting the Banking System Reform in China: An Analysis in Light of Japan's Experience of Financial Liberalization

China's banking system reform has made notable progress since 2002. After restoring their balance sheets, Chinese banks have aggressively increased lending and contributed to supporting the country' s economy given the global financial crisis. Thus far, the regulated deposit and lending interest rates, undeveloped capital markets, and restrictions in cross-border capital transactions have given banks an advantage in gaining profits. However, along with the full-blown reform of the economic system toward a market-oriented economy, the conditions protecting banks' profits will change in the future. The experiences of Japanese banks under the financial liberalization that occurred during the 1970s and 1980s indicate how important it is for commercial banks to change their business models in accordance with the fundamental changes in the economy. These experiences may be useful for considering the subsequent reform process of the financial system in China.Banking System Reform, Financial Liberalization, State-owned Commercial Banks, Rent for Banks

The Effects of Cyclodextrins on the Reduction of Ninhydrin with N-Alky1-1, 4-dihydronicotinamides

The effects of adding various cyclodextrins (α-,β- and γ-cyclodextrin) on the redox reaction between N-alky1-1, 4-dihydronicotinamide (hydride ion donnor) and ninhydrin (hydride ion acceptor) in aqueous solutions were studied kinetically. These reactions proceed through the hydride ion donnor-acceptor complex (CT complex) formation without cyclodextrin (CD). The presence of CD especially affects the reduction with N-benzy1-1,4-dihydronicotinamide (BNAH). β-CD is most effective for decreasing the reduction rate in three CDs. β-CD inhibited the formation of the CT complex by including BNAH molecule, which caused a decrease in the reaction rate. β-CD also completely inhibited the hydration of BNAH. γ-CD also included BNAH, however, it had little effect on the reduction rate constant. α-CD had no effect on both the reduction and the hydration. These inhibition behaviors were caused by an inclusion complex formation with CD

A theory of sovereign debt roll-over crisis

In this paper, we attempt to provide theoretical investigation to debt roll-over crisis in government bond market. By using the global game techniques, we analyse coordination problem in debt auction. The approach in this paper allows us to have insight on the relation between occurence of soverign debt roll-over crisis and the fundamentals of economy which is not clearly explained in preceding works. This paper also makes it clear how the amount of debt for refinancing affects occurrence of soverign debt roll-over crisis. Inplications to policymakers are that they should pay attention to possible serious consequence of debt-bunching which usually grows gradually over time. In public debt management, the government decisions today affect the situation facing the government in the future via change in redemption schedules. Although the cost of debt roll-over crisis is not easy to gauge beforehand, its possibility should be noted by policymakers