Can Delegating Bank Regulation to Market Forces Really Work?

A major theme in the literature on bank regulation is that greater reliance on market forces can help alleviate the moral hazard problem inherent in government sponsored deposit insurance. Proposals include minimum requirements on (1) uninsured subordinated debt financing (either fixed-term or with option-type features), and (2) private co-insurance on deposits. Such policies amount to delegating the responsibility for bank regulation to various private-sector claimholders. Our results show that, in general, such delegation (even if the claims include option-type features) is at best ineffective in lowering bank risk, at least within the present framework of deposit-taking institutions. We also show, however, that there are alternative mechanisms that will minimize regulatory costs, alleviate the moral hazard problem, and achieve first-best. But, the regulator (deposit insurer) must be an integral part of any solution; thus, such solutions are not attributable to market discipline

State-Contingent Bank Regulation

Current legislation attempts to solve incentive problems in bank regulation, by instituting polices such as risk-adjusted deposit insurance premiums, strict capital requirements, prompt closure policies, etc. Recent theoretical works have shown such policies to be neither necessary nor sufficient, per se, to solve these problems. In this paper, we present a model of incentive compatible bank regulation under moral hazard and adverse selection. We derive a wide range of simple mechanisms that can solve both types of incentive problems and also achieve first-best outcomes, but only when the regulatory instruments involve ex post pricing base don’t eh performance of the bank relative to the market. An important implication of the model is that these mechanisms need not involve a subsidy to the bank

Managing banks' duration gaps when interest rates are stochastic and equity has limited liability

Interest rate risk is an important consideration in both the management and regulation of depository financial institutions. Although the market value of equity is the most often used target of gap management, the conventional tools employed in the literature ignore a crucial characteristic of equity, viz., limited liability. In this article, we compare conventional techniques used to measure the duration gap for depository institutions with the limited liability techniques recently developed in the literature. Our results show that conventional models may over-estimate banks' interest rate risk exposures, especially during times when interest rate volatility and credit risk are at above average levels. This over-estimation may lead banks to make errors in their gap management. © 1999 Elsevier Science Inc. All rights reserved

Dynamic Credit Rationing in the Home Mortgage Market

In this study a model of dynamic credit rationing in the home mortgage market by a profit-maximizing financial institution is developed.In the 1960s and 1970s it was widely believed that credit rationing was very important in the mortgage market. The recent deregulation and innovation in financial markets is belived to have resulted in a significant weakening of these availability effects. For the model developed it is shown that deposit diversification, such as the introduction of money market accounts in 1978, would tend to reduce the amount of any dynamic credit rationing that was occurring. Copyright American Real Estate and Urban Economics Association.

The Asian Financial Crisis and Investors’ Risk Aversion

Asian financial crisis, Relative risk aversion, Banks, Chow test, Time-varying parameter model,

Efficiency in private banking: evidence from Switzerland and Liechtenstein

Data envelopment analysis, Technical efficiency, Private banking, D24, G21,