Vertical Integration and Regulation in the Securities Settlement Industry

The European Securities Trading and Post-trading (Clearing and Settlement) Industries have recently experienced a vast movement of consolidation. This was encouraged by the European Commission, seeking to establish a single market for the trade of financialsecurities across the European Union, and reduce the cost of cross-border transactions. For the regulator, the issue as a whole hinges on the need to allow for the achievement of economies of scale, while avoiding the possibility that an upstream monopolistic position might thwart competition in the downstream market, i.e. banking activities or securities trading activities. After long discussions with the industry, the European Commission considered that there was no need for regulation, provided that platforms adopted and implemented a "Code of Conduct". The present article challenges this view by showing that such a "Code of Conduct" may not be enough. We consider a model where custodians are competing to provide both custody services and banking services to investors. There is only one Central Security Deposit (CSD) where all the net orders must be in the end settled. Custodians have omnibus accounts in the CSD, for which they pay a fixed fee, and must pay an additional fee for each transaction. The CSD is directly competing with other custodians for the provision of custody and banking services. A key assumption is that because of economies of scale it would be socially inefficient to let several CSDs compete for the provision of depository and settlement services for a given security. Different types of regulator may be considered, such as the European commission, or those in place in other industries (telecom, energy). While the former may only impose external constraints on actors such as non-discriminatory access pricing or forbidding of integration, the latter may resort to a combination of monitoring and incentive regulation in order to extract information and impose a cost-based regulation.

L’accès des entreprises au crédit bancaire

Cherbonnier Frédéric, Aubier Maud. L'accès des entreprises au crédit bancaire. In: Économie & prévision, n°177, 2007-1. pp. 121-128

Decreasing Aversion under Ambiguity

This research was supported by the Chair of the Financière de la Cité at TSE, by the Chair SCOR-IDEI, and by the European Research Council under the European Community's Seventh Framework Programme (FP7/2007-2013) Grant Agreement no. 230589.International audienceUnder which condition does the set of desirable uncertain prospects expand when wealth increases? We show that the decreasing concavity (DC) of the utility function u is necessary and sufficient in the alpha-maxmin expected utility model. in the smooth ambiguity aversion model with the ambiguity valuation function phi, the DC of u and of phi o u is is necessary and sufficient. An alternative classical definition of decreasing aversion is based on the hypothesis that the investment in a risky asset is increasing in wealth. We show that this hypothesis does not hold in general under ambiguity aversion, and that one needs to constrain the structure of ambiguity to obtain unambiguous results

The economic determinants of risk-adjusted social discount rates

In theory, the measurement of the social value creation of any investment project requires estimating its consumption-based CAPM beta in order to compute its associated risk-adjusted discount rate. In order to assist evaluators to perform this task, we link this social beta to the underlying technical and economic environment of the project, such as the price and income elasticities of the supply and demand for the flow of goods and services generated by the investment. When the consumers’ willingness to pay and the variable production cost are Cobb-Douglas in aggregate income and quantity, the beta of the infrastructure has a flat term structure, and is positive for a normal good. But when the infrastructure has a limited capacity, the term structure of the beta is decreasing. Finally, as an illustration, we explain why an investment in a transfrontier trading infrastructure line should have a negative beta for the country that most often uses the line to export its cheaper good (such as electricity)

Optimal insurance for time-inconsistent agents

liquidity shocks for time-inconsistent agents who can privately store resources. When lack of self-control is strong enough, optimal contracts are similar to individual nancial accounts with remunerated savings and costly borrowing. The corresponding rate of return decreases with savings, which gives a theoretical rationale for pension accounts with decreasing incentive schemes, as implemented in most developed countries. Extending the model to an innite horizon, we show that, in the presence of repeated shocks, optimal contracts lead to impoverishment almost surely. Usury laws, capping interest rates, worsen this tendency To over-indebtedness for consumers with low risk aversion. By contrast, hidden storage constrains resource allocation for time-consistent agents, so that optimal contracts induce them to accumulate wealth. Those results show how lack of self-control changes the nature of optimal savings and borrowing instruments, with normative implications in terms of tax policy and credit regulation

Optimal insurance for time-inconsistent agents

liquidity shocks for time-inconsistent agents who can privately store resources. When lack of self-control is strong enough, optimal contracts are similar to individual nancial accounts with remunerated savings and costly borrowing. The corresponding rate of return decreases with savings, which gives a theoretical rationale for pension accounts with decreasing incentive schemes, as implemented in most developed countries. Extending the model to an innite horizon, we show that, in the presence of repeated shocks, optimal contracts lead to impoverishment almost surely. Usury laws, capping interest rates, worsen this tendency To over-indebtedness for consumers with low risk aversion. By contrast, hidden storage constrains resource allocation for time-consistent agents, so that optimal contracts induce them to accumulate wealth. Those results show how lack of self-control changes the nature of optimal savings and borrowing instruments, with normative implications in terms of tax policy and credit regulation

Risk-adjusted Social Discount Rates

When evaluating public and private investment projects, those that contribute more to the collective risk should be more penalized through an upward adjustment of their discount rate. This paper shows how to estimate the risk-adjusted discount rate for different projects, with applications to the electricity sector. Using the standard framework of consumer theory, we express any investment project's beta in terms of the easier-to-measure price and income elasticities of the goods generated by the project. When considering an investment in production capacity, the beta has a flat term structure, and is positive (negative) for normal (inferior) goods. When considering core infrastructures carrying goods or services, such as energy transmission and distribution assets, the beta has a decreasing term structure with very high values at short horizons for infrastructures facing capacity constraints. We provide a real-case example of a cross-border electricity connection with negative beta for the exporting country