Showing papers by "Alistair Milne published in 2007"

The industrial organization of post-trade clearing and settlement

Abstract: The introduction to this special issue reviews the literature on the industrial organization of securities market clearing and settlement, covering institutional, theoretical, and empirical contributions, including both papers in this special issue and previous studies. Clearing and settlement is an important but under-researched network industry. Recent theoretical research has characterized the network externalities in clearing and settlement and explored the economic efficiency of various alternative industrial structures. Initial empirical research has identified substantial economies of both scale and scope and important interactions with trading platforms. More research is needed to elaborate these theoretical insights and improve our understanding of the economics of this major industry.

Competition and the rationalization of European securities clearing and settlement

Abstract: How can competitive forces be harnessed to promote rationalisation of European securities settlement and create a single European market for the issue and trading of securities? This can be achieved through access price regulation of book transfer and the communication of instructions for corporate actions. This policy will: (i)allow cross-border competition in all other aspects of clearing and settlement, including depository services, clearing, and custody; (ii)leave only a minimal requirement for negotiated harmonisation of national standards, practices, tax arrangements, and legal frameworks; and (iii)enable market forces to decide appropriately on questions of horizontal or vertical integration in securities settlement. [99 words]

Standard Setting and Competition in Securities Settlement

Abstract: This paper examines the impact of messaging and technical standards on competition in the supply of securities transaction management services. Two simple switching cost models are used to clarify the impact of standards on barriers to entry and on the incentives to adopt harmonised and simplified securities processing standards. Policy implications are discussed briefly.

The lending channel under optimal choice of monetary policy

Abstract: Building on Cecchetti and Li (2005), we show that the bank lending channel affects monetary policy trade-offs only when interest rates affect marginal costs of production (ie when there is a cost channel of monetary policy) in the New Keynesian monetary policy model. In our calibrated model the resulting impact of the bank lending channel on output-inflation trade-offs is quantitatively small and of ambiguous sign. When bank capital varies counter cyclically and bank loan rates have a relatively large impact on marginal costs, variation of bank loan margins improves monetary policy trade-offs. The new Basel accord, by increasing capital requirements during economic downturns, offsets this beneficial impact. Keywords: bank capital, bank lending, capital buffers, pro-cyclicality, capital regulation, cost channel, credit channel, loan margins, monetary trade-offs JEL classification numbers: E51, E52, G21

Apples and Pears: The Comparison of Risk Capital and Required Return in Financial Institutions

Abstract: Risk capital is the contribution of an exposure to the default risk of a financial institution. We investigate its relationship with required shareholder returns, showing that the use of return on risk capital (RAROC) as a risk-adjusted performance measure is inconsistent with the standard theory of financial valuation and that using this one measure to represent at the same time both contribution to default risk and required shareholder returns can lead to substantial loss of shareholder value. We propose an alternative performance measure distinguishing these two aspects of risk and applicable to the efficient allocation of risk capital.

The relationship between risk capital and required returns in financial institutions: some preliminary results

Abstract: We use arbitrage arguments to characterise the relationship between required shareholder returns and the exposure to downside risk, as measured by VaR at stated confidence level and time horizon. We show that skewness and diversification have a major impact on zero-NPV RAROC (return on capital) hurdles, implying that use of return on capital with a constant hurdle rate can lead to substantial loss of shareholder value. We propose an alternative performance measure consistent with standard valuation models and discuss implications for prudential regulation.[93 words]

Governance and Innovation in UK Retail Payments

Abstract: This paper discusses recent developments in the governance and innovation of UK retail payments. It is a follow up to an earlier paper (Ganguly and Milne (2002b)) an interview study with senior payments management in eight UK banks. That study identified concerns about governance and weak incentives for innovation as major issues for the operation of retail payments systems in the UK. The present paper reviews the subsequent experience in the UK and draws lessons for payments innovation and governance across the European Union.

Standards and Competition in Post-trade Securities Processing

Abstract: Standards — agreed common arrangements governing both communication of messages and business processes — play a central role in the post-trade industry. This paper examines these standards, arguing that they need to be understood not simply as technical mechanisms to lower processing costs and improve cross-border interoperability, but as central determinants of competition. This can lead to inefficiency, as incumbents are likely to resist the adoption of harmonized standards when this threatens their competitive position. The prospects for efficient harmonization of standards in the post-trade industry are not however entirely bleak. Current policy measures being pursued to promote greater pan-European competition are focusing attention on those standards that are most critical for promoting greater competition in post-trade processing